# Chapter. How Well Am I Doing? Financial Statement Analysis

Size: px
Start display at page:

Transcription

1 Chapter 17 How Well Am I Doing? Financial Statement Analysis

2 17-2 LEARNING OBJECTIVES After studying this chapter, you should be able to: 1. Explain the need for and limitations of financial statement analysis. 2. Prepare financial statements in comparative form and explain how such statements are used. 3. Place the balance sheet and the income statement in common-size form and properly interpret the results. 4. Identify the ratios used to measure the wellbeing of the common shareholder and state each ratio s formula and interpretation.

3 17-3 LEARNING OBJECTIVES After studying this chapter, you should be able to: 5. Explain what is meant by the term financial leverage and show how financial leverage is measured. 6. Identify the ratios used to measure the wellbeing of the short-term creditor and state each ratio s formula and interpretation. 7. Identify the ratios used to measure the wellbeing of the long-term creditor and state each ratio s formula and interpretation.

4 Limitations of Financial Statement 17-4 Analysis Differences in accounting methods between companies sometimes make comparisons difficult. We use the FIFO method to value inventory. We use the LIFO method to value inventory.

5 Limitations of Financial Statement 17-5 Analysis Industry trends Technological changes Changes within the firm Consumer tastes Economic factors Analysts should look beyond the ratios.

6 Statements in Comparative and 17-6 Common-Size Form! Dollar and percentage changes on statements Analytical techniques used to examine relationships among financial statement items " Common-size statements # Ratios

7 Dollar and Percentage Changes on 17-7 Statements Comparing statements underscores movements and trends and may provide valuable clues about what to expect in the future. Horizontal analysis Trend analysis

8 17-8 Horizontal Analysis Horizontal analysis shows the changes between years in the financial data in both dollar and percentage form.

9 17-9 Horizontal Analysis Example The following slides illustrate a horizontal analysis of Clover Corporation s December 31, 2000 and 1999 comparative balance sheets and comparative income statements.

10 17-10 Horizontal Analysis CLOVER CORPORATION Comparative Balance Sheets December 31, 2000 and 1999 Increase (Decrease) Amount % Assets Current assets: Cash \$ 12,000 \$ 23,500 Accounts receivable, net 60,000 40,000 Inventory 80, ,000 Prepaid expenses 3,000 1,200 Total current assets 155, ,700 Property and equipment: Land 40,000 40,000 Buildings and equipment, net 120,000 85,000 Total property and equipment 160, ,000 Total assets \$ 315,000 \$ 289,700

11 17-11 Horizontal Analysis Calculating Change in Dollar Amounts Dollar Change Current Year = Figure Base Year Figure The dollar amounts for 1999 become the base year figures.

12 17-12 Horizontal Analysis Calculating Change as a Percentage Percentage Change Dollar Change = Base Year Figure 100%

13 17-13 Horizontal Analysis CLOVER CORPORATION Comparative Balance Sheets December 31, 2000 and 1999 Increase (Decrease) Amount % Assets Current assets: Cash \$ 12,000 \$ 23,500 \$ (11,500) (48.9) Accounts receivable, net 60,000 40,000 Inventory 80, ,000 Prepaid expenses 3,000 1,200 Total current assets \$12, ,000 \$23, ,700 = \$(11,500) Property and equipment: Land 40,000 40,000 Buildings and equipment, (\$11,500 net 120,000 \$23,500) 85, % = 48.9% Total property and equipment 160, ,000 Total assets \$ 315,000 \$ 289,700

14 17-14 Horizontal Analysis CLOVER CORPORATION Comparative Balance Sheets December 31, 2000 and 1999 Increase (Decrease) Amount % Assets Current assets: Cash \$ 12,000 \$ 23,500 \$ (11,500) (48.9) Accounts receivable, net 60,000 40,000 20, Inventory 80, ,000 (20,000) (20.0) Prepaid expenses 3,000 1,200 1, Total current assets 155, ,700 (9,700) (5.9) Property and equipment: Land 40,000 40, Buildings and equipment, net 120,000 85,000 35, Total property and equipment 160, ,000 35, Total assets \$ 315,000 \$ 289,700 \$ 25,

15 17-15 Horizontal Analysis We could do this for the liabilities & shareholders equity, but now let s look at the income statement accounts.

16 17-16 Horizontal Analysis CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, 2000 and 1999 Increase (Decrease) Amount % Net sales \$ 520,000 \$ 480,000 \$ 40, Cost of goods sold 360, ,000 45, Gross margin 160, ,000 (5,000) (3.0) Operating expenses 128, ,000 2, 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)

17 17-17 Horizontal Analysis CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, 2000 and 1999 Increase (Decrease) Amount % Net sales \$ 520,000 \$ 480,000 \$ 40, Cost of goods sold 360, ,000 45, Gross margin 160, ,000 (5,000) (3.0) Operating expenses 128, ,000 2, Sales increased by 8.3% yet Net operating income 31,400 39,000 (7,600) (19.5) net income decreased by 21.9%. 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)

18 17-18 Horizontal Analysis CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, 2000 and 1999 Increase increase in sales, yielding an overall (Decrease) decrease in net income Amount % Net sales \$ 520,000 \$ 480,000 \$ 40, Cost of goods sold 360, ,000 45, Gross margin 160, ,000 (5,000) (3.0) Operating expenses 128, ,000 2, 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

19 17-19 Trend Percentages Trend percentages state several years financial data in terms of a base year, which equals 100 percent.

20 17-20 Trend Analysis Trend Percentage Current Year Amount Base Year Amount = 100%

21 17-21 Trend Analysis Example Look at the income information for Berry Products for the years 1998 through We will do a trend analysis on these amounts to see what we can learn about the company.

22 17-22 Trend Analysis Berry Products Income Information For the Years Ended December 31, Year Item Sales \$ 400,000 \$ 355,000 \$ 320,000 \$ 290,000 \$ 275,000 Cost of goods sold 285, , , , ,000 Gross margin 115, ,000 95,000 92,000 85,000 The base year is 1998, and its amounts will equal 100%.

23 17-23 Trend Analysis Berry Products Income Information For the Years Ended December 31, Year Item Sales 105% 100% Cost of goods sold 104% 100% Gross margin 108% 100% 1999 Amount 1998 Amount 100% ( \$290,000 \$275,000 ) 100% = 105% ( \$198,000 \$190,000 ) 100% = 104% ( \$ 92,000 \$ 85,000 ) 100% = 108%

24 17-24 Trend Analysis Berry Products Income Information For the Years Ended December 31, Year Item Sa le s 145% 129% 116% 105% 100% Cost of goods sold 150% 132% 118% 104% 100% Gross margin 135% 124% 112% 108% 100% By analyzing the trends for Berry Products, we can see that cost of goods sold is increasing faster than sales, which is slowing the increase in gross margin.

25 17-25 Trend Analysis We can use the trend percentages to construct a graph so we can see the trend over time. Percentage Sales COGS GM Year

26 17-26 Common-Size Statements Common-size statements use percentages to express the relationship of individual components to a total within a single period. This is also known as vertical analysis.

27 17-27 Common-Size Statements Example Let s take another look at the information from the comparative income statements of Clover Corporation for 2000 and This time let s prepare common-size statements.

28 17-28 Common-Size Statements CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, 2000 and 1999 Common-Size Percentages Net sales \$ 520,000 \$ 480, Cost of goods sold 360, ,000 Gross margin 160, ,000 Operating expenses 128, ,000 Net operating income 31,400 39,000 Interest expense 6,400 7,000 Net income before taxes 25,000 32,000 Less income taxes (30%) 7,500 9,600 Net income \$ 17,500 \$ 22,400 Net sales Net sales is usually the base and is expressed as 100%.

29 17-29 Common-Size Statements CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, 2000 and 1999 Common-Size Percentages Net sales \$ 520,000 \$ 480, Cost of goods sold 360, , Gross margin 160, ,000 Operating expenses 128, ,000 Net operating 2000 COGS income 2000 Net 31,400 Sales 39, % Interest ( \$360,000 expense \$520,000 6,400 ) 100% 7,000 = 69.2% Net income before taxes 25,000 32,000 Less income taxes 1999 (30%) COGS 7, Net 9,600 Sales 100% Net income \$ 17,500 \$ 22,400 ( \$315,000 \$480,000 ) 100% = 65.6%

30 17-30 Gross Margin Percentage Gross Margin Percentage = Gross Margin Sales This measure indicates how much of each sales dollar is left after deducting the cost of goods sold to cover operating expenses and a profit.

31 17-31 Common-Size Statements CLOVER CORPORATION Comparative Income Statements For the Years Ended December 31, 2000 and 1999 Common-Size What conclusions can we draw? Percentages Net sales \$ 520,000 \$ 480, Cost of goods sold 360, , Gross margin 160, , Operating expenses 128, , Net operating income 31,400 39, Interest expense 6,400 7, Net income before taxes 25,000 32, Less income taxes (30%) 7,500 9, Net income \$ 17,500 \$ 22,

32 Now, let s look at Norton Corporation s 2000 and 1999 financial statements

33 NORTON CORPORATION Balance Sheets December 31, 2000 and Asse ts Current assets: Cash \$ 30,000 \$ 20,000 Accounts receivable, net 20,000 17,000 Inventory 12,000 10,000 Prepaid expenses 3,000 2,000 Total current assets 65,000 49,000 Property and equipment: Land 165, ,000 Buildings and equipment, net 116, ,000 Total property and equipment 281, ,000 Total assets \$ 346,390 \$ 300,000

34 December 31, 2000 and Liabilities and Shareholders' Equity Current liabilities: Accounts payable \$ 39,000 \$ 40,000 Notes payable, short-term 3,000 2,000 Total current liabilities 42,000 42,000 Long-term liabilities: Notes payable, long-term 70,000 78,000 Total liabilities 112, ,000 Shareholders' equity: Common stock, \$1 par value 27,400 17,000 Contributed surplus 158, ,000 Total capital 185, ,000 Retained earnings 48,890 50,000 Total shareholders' equity 234, ,000 Total liabilities and shareholders' equity \$ 346,390 \$ 300,000

35 17-35 NORTON CORPORATION Income Statements For the Years Ended December 31, 2000 and Net sales \$ 494,000 \$ 450,000 Cost of goods sold 140, ,000 Gross margin 354, ,000 Operating expenses 270, ,000 Net operating income 84,000 74,000 Interest expense 7,300 8,000 Net income before taxes 76,700 66,000 Less income taxes (30%) 23,010 19,800 Net income \$ 53,690 \$ 46,200

36 Now, let s calculate some ratios based on Norton Corporation s financial statements

37 Ratio Analysis The Common Shareholder Use this information to calculate ratios to measure the wellbeing of the common shareholders of Norton Corporation. NORTON CORPORATION 2000 Number of common shares outstanding Beginning of year 17,000 End of year 27,400 Net income \$ 53,690 Shareholders' equity Beginning of year 180,000 End of year 234,390 Dividends per share 2 Dec. 31 market price per share 20 Interest expense 7,300 Total assets Beginning of year 300,000

38 17-38 Earnings Per Share Earnings per Share = Net Income Preferred Dividends Average Number of Common Shares Outstanding Earnings per Share = \$53,690 \$0 = \$2.42 (17, ,400)/2 This measure indicates how much income was earned for each share of common stock outstanding.

39 17-39 Price-Earnings Ratio Price-Earnings Ratio = Market Price Per Share Earnings Per Share Price-Earnings Ratio \$20.00 = = 8.26 times \$2.42 This measure is often used by investors as a general guideline in gauging stock values. Generally, the higher the priceearnings ratio, the more opportunity a company has for growth.

40 17-40 Dividend Payout Ratio Dividend Payout Ratio = Dividends Per Share Earnings Per Share Dividend Payout Ratio \$2.00 = = 82.6% \$2.42 This ratio gauges the portion of current earnings being paid out in dividends. Investors seeking current income would like this ratio to be large.

41 17-41 Dividend Yield Ratio Dividend Yield Ratio = Dividends Per Share Market Price Per Share Dividend Yield Ratio \$2.00 = = 10.00% \$20.00 This ratio identifies the return, in terms of cash dividends, on the current market price of the stock.

42 17-42 Return on Total Assets Return on Total Assets = Net Income + [Interest Expense (1 Tax Rate)] Average Total Assets Whenever a ratio divides an income statement balance by a balance sheet balance, the average for the year is used in the denominator.

43 17-43 Return on Total Assets Return on Total Assets = Net Income + [Interest Expense (1 Tax Rate)] Average Total Assets Return on Total Assets \$53,690 +[7,300 (1 0.30)] = = 18.19% (\$300,000 + \$346,390) 2 This ratio measures how well assets have been employed.

44 Return on Common Shareholders Equity Return on Common Shareholders Equity = Net Income Preferred Dividends Average Shareholders Equity Return on Common Shareholders Equity = \$53,690 \$0 = 25.91% (\$180,000 + \$234,390) 2 This measure indicates how well the company employed the owners investments to earn income.

45 17-45 Financial Leverage Financial leverage involves acquiring assets with funds at a fixed rate of interest. Return on investment in assets > Fixed rate of return on borrowed funds = Positive financial leverage Return on investment in assets < Fixed rate of return on borrowed funds = Negative financial leverage

46 17-46 Book Value Per Share Book Value per Share = Common Shareholders Equity Number of Common Shares Outstanding Book Value per Share = \$234,390 27,400 = \$ 8.55 This ratio measures the amount that would be distributed to holders of each share of common stock if all assets were sold at their balance sheet carrying amounts and if all creditors were paid off.

47 Ratio Analysis The Short Term Creditor Use this information to calculate ratios to measure the well-being of the short-term creditors for Norton Corporation. NORTON CORPORATION 2000 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 Tota l current liabilitie s 42,000 Sales on account 500,000 Cost of goods sold 140,000

48 17-48 Working Capital December 31, 2000 Current assets \$ 65,000 Current liabilities (42,000) Working capital \$ 23,000

49 17-49 Current Ratio Current Ratio = Current Assets Current Liabilities Current Ratio = \$65,000 = 1.55 : 1 \$42,000 This ratio measures the ability of the company to pay current debts as they become due.

50 17-50 Acid-Test (Quick) Ratio Acid-Test Ratio = Quick Assets Current Liabilities Quick assets are Cash, Marketable Securities, Accounts Receivable and current Notes Receivable. Norton Corporation s quick assets consist of cash of \$30,000 and accounts receivable of \$20,000.

51 17-51 Acid-Test (Quick) Ratio Acid-Test Ratio = Quick Assets Current Liabilities Acid-Test Ratio = \$50,000 \$42,000 = 1.19 : 1 This ratio is like the current ratio but excludes current assets such as inventories that may be difficult to quickly convert into cash.

52 17-52 Accounts Receivable Turnover Accounts Receivable Turnover = Sales on Account Average Accounts Receivable Accounts Receivable Turnover = \$500,000 (\$17,000 + \$20,000) 2 = times This ratio measures how many times a company converts its receivables into cash each year.

53 17-53 Average Collection Period Average Collection Period = 365 Days Accounts Receivable Turnover Average Collection Period = 365 Days Times = days This ratio measures, on average, how many days it takes to collect an account receivable.

54 17-54 Inventory Turnover Inventory Turnover = Cost of Goods Sold Average Inventory Inventory Turnover = \$140,000 (\$10,000 + \$12,000) 2 = times This ratio measures the number of times merchandise inventory is sold and replaced during the year.

55 17-55 Average Sale Period Average Sale Period = 365 Days Inventory Turnover Average Sale Period = 365 Days Times = days This ratio measures how many days, on average, it takes to sell the inventory.

56 Ratio Analysis The Long Term Creditor Use this information to calculate ratios to measure the well-being of the long-term creditors for Norton Corporation. This is also referred to as net operating income. NORTON CORPORATION 2000 Earnings before interest \$ 84,000 expense and income taxes Interest expense 7,300 Total shareholders' equity 234,390 Total liabilities 112,000

57 17-57 Times Interest Earned Ratio Times Interest Earned = Earnings before Interest Expense and Income Taxes (EBIT) Interest Expense Times Interest Earned \$84,000 = = 11.5 times 7,300 This is the most common measure of the ability of a firm s operations to provide protection to the long-term creditor.

58 17-58 Debt-to-Equity Ratio Debt to Equity Ratio = Total Liabilities Shareholders Equity Debt to Equity Ratio \$112,000 = = 0.48 to 1 \$234,390 This ratio measures the amount of assets being provided by creditors for each dollar of assets being provided by the owners of the company.

59 17-59 Return on Investment (ROI) ROI = = = Net Operating Income Sales Net Operating Income (EBIT) Average Operating Assets 84,000 (300, ,390) 2 x Sales Average Operating Assets = 26% This ratio measures the amount of income earned for each dollar of assets.

60 17-60 Published Sources of Financial Ratios Source Industrial Corporations, Financial Statistics Moody's Bond Record Corporate Taxation Statistics Dun & Bradstreets' Canadian Key Directory Financial Post's Dividend Record Financial Post's "500" Content Financial statements of different sectors Performance of corporate, convertible, government and municiple bonds Taxable income and taxes payable by Canadian corporations Business profile on top 3% of Canadian companies Record of dividends Largest 500 companies, by sales, in Canada

61 17-61 End of Chapter 17

### Income Measurement and Profitability Analysis

PROFITABILITY ANALYSIS The following financial statements for Spencer Company will be used to demonstrate the calculation of the various ratios in profitability analysis. Spencer Company Comparative Balance

### Return on Equity has three ratio components. The three ratios that make up Return on Equity are:

Evaluating Financial Performance Chapter 1 Return on Equity Why Use Ratios? It has been said that you must measure what you expect to manage and accomplish. Without measurement, you have no reference to

### Chapter 17: Financial Statement Analysis

FIN 301 Class Notes Chapter 17: Financial Statement Analysis INTRODUCTION Financial ratio: is a relationship between different accounting items that tells something about the firm s activities. Purpose

### Financial ratios can be classified according to the information they provide. The following types of ratios frequently are used:

Financial Ratios Financial ratios are useful indicators of a firm's performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Financial ratios

### Financial Statements and Ratios: Notes

Financial Statements and Ratios: Notes 1. Uses of the income statement for evaluation Investors use the income statement to help judge their return on investment and creditors (lenders) use it to help

### Course 1: Evaluating Financial Performance

Excellence in Financial Management Course 1: Evaluating Financial Performance Prepared by: Matt H. Evans, CPA, CMA, CFM This course provides a basic understanding of how to use ratio analysis for evaluating

### Ratio Analysis. A) Liquidity Ratio : - 1) Current ratio = Current asset Current Liability

A) Liquidity Ratio : - Ratio Analysis 1) Current ratio = Current asset Current Liability 2) Quick ratio or Acid Test ratio = Quick Asset Quick liability Quick Asset = Current Asset Stock Quick Liability

### FSA Note: Summary of Financial Ratio Calculations

FSA Note: Summary of Financial Ratio Calculations This note contains a summary of the more common financial statement ratios. A few points should be noted: Calculations vary in practice; consistency and

### 2-8. Identify whether each of the following items increases or decreases cash flow:

Problems 2-8. Identify whether each of the following items increases or decreases cash flow: Increase in accounts receivable Increase in notes payable Depreciation expense Increase in investments Decrease

### How To Calculate Financial Leverage Ratio

What Do Short-Term Liquidity Ratios Measure? What Is Working Capital? HOCK international - 2004 1 HOCK international - 2004 2 How Is the Current Ratio Calculated? How Is the Quick Ratio Calculated? HOCK

### BACKGROUND KNOWLEDGE for Teachers and Students

Pathway: Business, Marketing, and Computer Education Lesson: BMM C6 4: Financial Statements and Reports Common Core State Standards for Mathematics: N.Q.2 Domain: Quantities Cluster: Reason quantitatively

### Vertical and Horizontal Analysis. Financial Analysis. Lecturer: Dr. Constantinos Adamides

Vertical and Horizontal Analysis Financial Analysis Lecturer: Dr. Constantinos Adamides Horizontal Analysis Comparison of financial information of a single company for two more years Examination of absolute

### * * * Chapter 15 Accounting & Financial Statements. Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall

Chapter 15 Accounting & Financial Statements Copyright 2013 Pearson Education, Inc. publishing as Prentice Hall Bookkeeping vs. Accounting Bookkeeping Accounting The recording of business transactions.

### Liquidity and Working Capital Analysis

8 Lecture Liquidity and Working Capital Analysis Liquidity and Working Capital Operating Activity Additional Liquidity Measures Current assets Current Liabilities Working Capital Current ratio Cash-based

### Chapter Twenty-One. Statements. After completing this chapter, you should be able to: analysis, vertical analysis, and ratio analysis.

Chapter Twenty-One 21Analyzing Financial Statements After completing this chapter, you should be able to: 1 Explain the objectives of financial statement analysis. 2 Describe and use the following four

### Financial Statement and Cash Flow Analysis

Chapter 2 Financial Statement and Cash Flow Analysis Answers to Concept Review Questions 1. What role do the FASB and SEC play with regard to GAAP? The FASB is a nongovernmental, professional standards

### TYPES OF FINANCIAL RATIOS

TYPES OF FINANCIAL RATIOS In the previous articles we discussed how to invest in the stock market and unit trusts. When investing in the stock market an investor should have a clear understanding about

### Ratio Analysis 0.75. Fixed Assets Fixed Assets + Net Working Capital =0.75 Fixed Assets

Ratio Analysis CA Past Years Exam Answer Answer to Q.1: (Nov, 009) Fixed assets ` 18,00,000 Proprietor s funds ` 4,00,000 Note: 1 Ratio of fixed assets to proprietor s funds 0.75 Properietors Fund 0.75

### Total shares at the end of ten years is 100*(1+5%) 10 =162.9.

FCS5510 Sample Homework Problems Unit04 CHAPTER 8 STOCK PROBLEMS 1. An investor buys 100 shares if a \$40 stock that pays a annual cash dividend of \$2 a share (a 5% dividend yield) and signs up for the

### ILLUSTRATION 5-1 BALANCE SHEET CLASSIFICATIONS

ILLUSTRATION 5-1 BALANCE SHEET CLASSIFICATIONS MAJOR BALANCE SHEET CLASSIFICATIONS ASSETS = LIABILITIES + OWNERS' EQUITY Current Assets Long-Term Investments Current Liabilities Long-Term Debt Capital

### ICAP GROUP S.A. FINANCIAL RATIOS EXPLANATION

ICAP GROUP S.A. FINANCIAL RATIOS EXPLANATION OCTOBER 2006 Table of Contents 1. INTRODUCTION... 3 2. FINANCIAL RATIOS FOR COMPANIES (INDUSTRY - COMMERCE - SERVICES) 4 2.1 Profitability Ratios...4 2.2 Viability

### 140 SU 3: Profitability Analysis and Analytical Issues

140 SU 3: Profitability Analysis and Analytical Issues QUESTIONS 3.1 Profitability Ratios Questions 1 and 2 are based on the following information. The financial statements for Dividendosaurus, Inc., for

### Financial Ratios and Quality Indicators

Financial Ratios and Quality Indicators From U.S. Small Business Administration Online Women's Business Center If you monitor the ratios on a regular basis you'll gain insight into how effectively you

### Analyzing the Statement of Cash Flows

Analyzing the Statement of Cash Flows Operating Activities NACM Upstate New York Credit Conference 2015 By Ron Sereika, CCE,CEW NACM 1 Objectives of this Educational Session u Show how the statement of

### FINANCIAL ACCOUNTING TOPIC: FINANCIAL ANALYSIS

SYLLABUS Compulsory part Basic ratio analysis 1. State the general functions of accounting ratios. 2. Calculate and interpret the following ratios: a. working capital/current ratio, quick/liquid/acid test

### SOLUTIONS. Learning Goal 30

S1 Learning Goal 30 Multiple Choice 1. d 2. d 3. b 4. a Earnings per share is also used directly for comparing profitability on a per-share basis. 5. d 6. c An airline would have a much greater investment

### Understanding Financial Information for Bankruptcy Lawyers Understanding Financial Statements

Understanding Financial Information for Bankruptcy Lawyers Understanding Financial Statements In the United States, businesses generally present financial information in the form of financial statements

### Ratios from the Statement of Financial Position

For The Year Ended 31 March 2007 Ratios from the Statement of Financial Position Profitability Ratios Return on Sales Ratio (%) This is the difference between what a business takes in and what it spends

### CHAPTER 2 FINANCIAL STATEMENTS AND CASH FLOW

CHAPTER 2 FINANCIAL STATEMENTS AND CASH FLOW Solutions to Questions and Problems NOTE: All end-of-chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and

### 1. Operating, Investment and Financial Cash Flows

1. Operating, Investment and Financial Cash Flows Solutions Problem 1 During 2005, Myears Oil Co. had gross sales of \$1 000,000, cost of goods sold of \$400,000, and general and selling expenses of \$300,000.

### Chapter Review Problems

Chapter Review Problems Unit 17.1 Income statements 1. When revenues exceed expenses, is the result (a) net income or (b) net loss? (a) net income 2. Do income statements reflect profits of a business

### Gleim / Flesher CMA Review 15th Edition, 1st Printing Part 2 Updates Available December 2010

Page 1 of 3 Gleim / Flesher CMA Review 15th Edition, 1st Printing Part 2 Updates Available December 2010 NOTE: Text that should be deleted from the outline is displayed as struck through with a red background.

### E2-2: Identifying Financing, Investing and Operating Transactions?

E2-2: Identifying Financing, Investing and Operating Transactions? Listed below are eight transactions. In each case, identify whether the transaction is an example of financing, investing or operating

### Interpretation of Financial Statements

Interpretation of Financial Statements Author Noel O Brien, Formation 2 Accounting Framework Examiner. An important component of most introductory financial accounting programmes is the analysis and interpretation

### Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions

Understanding Financial Management: A Practical Guide Guideline Answers to the Concept Check Questions Chapter 3 Interpreting Financial Ratios Concept Check 3.1 1. What are the different motivations that

### RAPID REVIEW Chapter Content

RAPID REVIEW BASIC ACCOUNTING EQUATION (Chapter 2) INVENTORY (Chapters 5 and 6) Basic Equation Assets Owner s Equity Expanded Owner s Owner s Assets Equation = Liabilities Capital Drawing Revenues Debit

### Creating a Successful Financial Plan

Creating a Successful Financial Plan Basic Financial Reports Balance Sheet - Estimates the firm s worth on a given date; built on the accounting equation: Assets = Liabilities + Owner s Equity Income Statement

### Understanding Cash Flow Statements

Understanding Cash Flow Statements 2014 Level I Financial Reporting and Analysis IFT Notes for the CFA exam Contents 1. Introduction... 3 2. Components and Format of the Cash Flow Statement... 3 3. The

### Gross Sales (Gross Revenue): the total amount of money received from customers

Chapter 17 Financial Statements and Ratios 17.1: The Income Statement 17.1.1: Learn the terms used with income statements Income Statement: a financial statement used to summarize all income and expenses

Ratio Analysis CBDC, NB February, 2008 Presented by ACSBE Financial Analysis What is Financial Analysis? What Can Financial Ratios Tell? 7 Categories of Financial Ratios Significance of Using Ratios Industry

### Financial ratio analysis

Financial ratio analysis A reading prepared by Pamela Peterson Drake O U T L I N E 1. Introduction 2. Liquidity ratios 3. Profitability ratios and activity ratios 4. Financial leverage ratios 5. Shareholder

### The Interpretation of Financial Statements. Why use ratio analysis. Limitations. Chapter 16

The Interpretation of Financial Statements Chapter 16 1 Luby & O Donoghue (2005) Why use ratio analysis Provides framework Comparison to previous years Trends identified Identify areas of concern Targets

### Often stock is split to lower the price per share so it is more accessible to investors. The stock split is not taxable.

Reading: Chapter 8 Chapter 8. Stock: Introduction 1. Rights of stockholders 2. Cash dividends 3. Stock dividends 4. The stock split 5. Stock repurchases and liquidations 6. Preferred stock 7. Analysis

### Discussion Board Articles Ratio Analysis

Excellence in Financial Management Discussion Board Articles Ratio Analysis Written by: Matt H. Evans, CPA, CMA, CFM All articles can be viewed on the internet at www.exinfm.com/board Ratio Analysis Cash

### Study Guide - Final Exam Accounting I

Study Guide - Final Exam Accounting I True/False Indicate whether the sentence or statement is true or false. 1. Entries in a sales journal affect account balances in both the accounts receivable ledger

### Preparing a Successful Financial Plan

Topic 9 Preparing a Successful Financial Plan LEARNING OUTCOMES By the end of this topic, you should be able to: 1. Describe the overview of accounting methods; 2. Prepare the three major financial statements

### CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW

CHAPTER 2 ACCOUNTING STATEMENTS, TAXES, AND CASH FLOW Answers to Concepts Review and Critical Thinking Questions 1. True. Every asset can be converted to cash at some price. However, when we are referring

### Using Accounts to Interpret Performance

Using s to Interpret Performance ing information is used by stakeholders to judge the performance and efficiency of a business Different stakeholders will look for different things: STAKEHOLDER Shareholders

### 2. More important - provide a profile of firm s economic characteristics and competitive strategies.

RATIO ANALYSIS-OVERVIEW Ratios: 1. Provide a method of standardization 2. More important - provide a profile of firm s economic characteristics and competitive strategies. C Company Sales \$ 100,000 \$ 125,000

### E5-4 Assessing receivable and inventory turnover (AICPA adapted)

E5-4 Assessing receivable and inventory turnover (AICPA adapted) Accounts receivable turnover Net credit sales = Average trade receivables = \$2,500,000 \$462,500 = 5.41 times where average trade receivables

ABOUT FINANCIAL RATIO ANALYSIS Over the years, a great many financial analysis techniques have developed. They illustrate the relationship between values drawn from the balance sheet and income statement

### Exercise 17-1 (15 minutes)

Exercise 17-1 (15 minutes) 1. 2002 2001 Sales... 100.0% 100.0 % Less cost of goods sold... 63.2 60.0 Gross margin... 36.8 40.0 Selling expenses... 18.0 17.5 Administrative expenses... 13.6 14.6 Total expenses...

### Chapter 1 Financial Statement and Cash Flow Analysis

Chapter 1 Financial Statement and Cash Flow Analysis MULTIPLE CHOICE 1. Which of the following items can be found on an income statement? a. Accounts receivable b. Long-term debt c. Sales d. Inventory

### performance of a company?

How to deal with questions on assessing the performance of a company? (Relevant to ATE Paper 7 Advanced Accounting) Dr. M H Ho This article provides guidance for candidates in dealing with examination

FINANCIAL PERFORMANCE INDICATORS FOR CANADIAN BUSINESS Concepts, Sources and Methods Symbols The following standard symbols are used in Statistics Canada publications:.. figures not available.... figures

### Solutions to Chapter 4. Measuring Corporate Performance

Solutions to Chapter 4 Measuring Corporate Performance 1. a. 7,018 Long-term debt ratio 0. 42 7,018 9,724 b. 4,794 7,018 6,178 Total debt ratio 0. 65 27,714 c. 2,566 Times interest earned 3. 75 685 d.

### Please NOTE This example report is for a manufacturing company; however, we can address a similar report for any industry sector.

Please NOTE This example report is for a manufacturing company; however, we can address a similar report for any industry sector. Performance Review For the period ended 12/31/2013 Provided By Holbrook

### Credit Analysis 10-1

Credit Analysis 10-1 10-2 Liquidity and Working Capital Basics Liquidity - Ability to convert assets into cash or to obtain cash to meet short-term obligations. Short-term - Conventionally viewed as a

### TOPIC LEARNING OBJECTIVE

Topic Mapping 1 Transaction Analysis Understand the effect of various types of transactions on the accounting equation, accounting journal and accounting ledger. Concepts and Skills Accounting Equation

### REVIEW FOR FINAL EXAM, ACCT-2302 (SAC)

REVIEW FOR FINAL EXAM, ACCT-2302 (SAC) CHAPTER 13 1. Corporate Organization: a. Application for incorporation. b. State grants Charter or Articles of Incorporation. c. By-laws: rules and procedures of

### Overview of Financial 1-1. Statement Analysis

Overview of Financial 1-1 Statement Analysis 1-2 Financial Statement Analysis Financial Statement Analysis is an integral and important part of the business analysis. Business analysis? Process of evaluating

### Fundamental Analysis Ratios

Fundamental Analysis Ratios Fundamental analysis ratios are used to both measure the performance of a company relative to other companies in the same market sector and to value a company. There are three

### Using Financial Ratios: Interested Parties

Using Financial Ratios: Interested Parties Ratio analysis involves methods of calculating and interpreting financial ratios to assess a firm s financial condition and performance. It is of interest to

### Financial Planning for East Coast Yachts

Financial Planning for East Coast Yachts Prepared for East Coast Yachts Prepared by Dan Ervin, Mary-Ann Lawrence, Kevin Klepacki, Katie Wilson, Andrew Wright January 1, 2010 Table of Contents iii Table

### Liquidity analysis: Length of cash cycle

2. Liquidity analysis: Length of cash cycle Operating cycle of a merchandising firm: number of days it takes to sell inventory + number of days until the resulting receivables are converted to cash Acquisition

### HHIF Lecture Series: Financial Statement Analysis

HHIF Lecture Series: Financial Statement Analysis Alexander Remorov Based on the Materials by Daanish Afzal University of Toronto November 5, 2010 Alexander Remorov, Daanish Afzal (University of Toronto)

### Financial Terms & Calculations

Financial Terms & Calculations So much about business and its management requires knowledge and information as to financial measurements. Unfortunately these key terms and ratios are often misunderstood

### 9901_1. A. 74.19 days B. 151.21 days C. 138.46 days D. 121.07 days E. 84.76 days

1. A stakeholder is: 9901_1 Student: A. a creditor to whom a firm currently owes money. B. any person who has voting rights based on stock ownership of a corporation. C. any person or entity other than

### CHAPTER 6. P.6.17 The following are the ratios relating to the activities of National Traders Ltd:

CHAPTER 6 Solved Problems P.6.17 The following are the ratios relating to the activities of National Traders Ltd: Debtors velocity (months) 3 Stock velocity (months) 8 Creditors velocity (months) 2 Gross

### Section 12.1 Financial Ratios Section 12.2 Break-Even Analysis

Section 12.1 Financial Ratios Section 12.2 Break-Even Analysis OBJECTIVES Explain what a financial ratio is Describe how income statements are used for financial analysis Compare operating ratios and return-on-sales

### ESSENTIALS OF ENTREPRENEURSHIP AND SMALL BUSINESS MANAGEMENT 6E

CHAPTER 11 Creating a Successful Financial Plan The Importance of a Financial Plan Financial planning is essential to running a successful business and is not that difficult! Common mistake among business

### For our curriculum in Grade 12 we are going to use ratios to analyse the information available in the Income statement and the Balance sheet.

SUBJECT: ACCOUNTING GRADE 12 CHAPTER: COMPANIES LESSON: ANALYSIS AND INTERPRETATION-RATIOS LESSON OVERVIEW (KNOWLEDGE AREAS) LESSON 1. Introduction 2. Analysing of financial statements and its purpose

### NWC = current assets - current liabilities = 2,100

Questions and Problems Chapters 2,3 pp45-47 1. Building a balance sheet. Penguin Pucks, Inc., has current assets of \$3,000, net fixed assets \$6,000, current liabilities of \$900, and long-term debt of \$5,000.

### Financial Statement Ratio Analysis

Management Accounting 319 Financial Statement Ratio Analysis Financial statements as prepared by the accountant are documents containing much valuable information. Some of the information requires little

### Chapter 2 Financial Statement and Cash Flow Analysis

Chapter 2 Financial Statement and Cash Flow Analysis MULTIPLE CHOICE 1. Which of the following items can be found on an income statement? a. Accounts receivable b. Long-term debt c. Sales d. Inventory

### UNIVERSITY OF WATERLOO School of Accounting and Finance

UNIVERSITY OF WATERLOO School of Accounting and Finance AFM 101 Professor Duane Kennedy Mid-Term Examination Fall 2008 Date and Time: October 16, 2008, 7:15 8:45pm Pages: 16, including cover Name: Student

### Appendix. Selected Financial Ratios Useful in Analytical Procedures

Selected Financial Ratios Useful in Analytical Procedures < Appendix D A number of financial ratios are used by auditors as analytical procedures. These ratios are broken down into four categories: short-term

### Chapter 14 Financial Ratios and Firm Performance

Chapter 14 Financial Ratios and Firm Performance LEARNING OBJECTIVES 1. Create, understand, and interpret common-size financial statements. 2. Calculate and interpret financial ratios. (Slide 14-2) 3.

### CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH

CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH Answers to Concepts Review and Critical Thinking Questions 5. The sustainable growth rate is greater than 20 percent, because at a 20 percent growth rate

### CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH

CHAPTER 3 LONG-TERM FINANCIAL PLANNING AND GROWTH Answers to Concepts Review and Critical Thinking Questions 1. Time trend analysis gives a picture of changes in the company s financial situation over

### LEBANESE ASSOCIATION OF CERTIFIED PUBLIC ACCOUNTANTS MANAGERIAL ACCOUNTING

LEBANESE ASSOCIATION OF CERTIFIED PUBLIC ACCOUNTANTS MANAGERIAL ACCOUNTING JULY 2015 MULTIPLE CHOICE QUESTIONS (37.5%) Choose the correct answer 1. All of the following statements concerning standard costs

### GBA 521 Midterm Review Dr. Markelevich

GBA 521 Midterm Review Dr. Markelevich Multiple Choice (3 points for each question) Identify the letter of the choice that best completes the statement or answers the question. Wynn Corp. Wynn Corp. reported

### Computing Liquidity Ratios Current Ratio = CA / CL 708 / 540 = 1.31 times Quick Ratio = (CA Inventory) / CL (708 422) / 540 =.53 times Cash Ratio =

1 Computing Liquidity Ratios Current Ratio = CA / CL 708 / 540 = 1.31 times Quick Ratio = (CA Inventory) / CL (708 422) / 540 =.53 times Cash Ratio = Cash / CL 98 / 540 =.18 times 2 Computing Leverage

### What is a business plan?

What is a business plan? A business plan is the presentation of an idea for a new business. When a person (or group) is planning to open a business, there is a great deal of research that must be done

### Financial Ratio Cheatsheet MyAccountingCourse.com PDF

Financial Ratio Cheatsheet MyAccountingCourse.com PDF Table of contents Liquidity Ratios Solvency Ratios Efficiency Ratios Profitability Ratios Market Prospect Ratios Coverage Ratios CPA Exam Ratios to

### Frequently Used Formulas for Managing Operations

Frequently Used Formulas for Managing Operations Chapter 1 - Hospitality Industry Accounting Revenue Expenses = Profit Assets = Liabilities + Owners Equity Chapter 2 - Accounting Fundamentals Review Assets

### CHAPTER 11 ANALYZING FINANCIAL STATEMENTS: A MANAGERIAL PERSPECTIVE

CHAPTER 11 ANALYZING FINANCIAL STATEMENTS: A MANAGERIAL PERSPECTIVE Bill Reston is the chief operating officer of Valley Home Loans, a residential mortgage lender located in Philadelphia, Pennsylvania.

### Performance Review for Electricity Now

Performance Review for Electricity Now For the period ending 03/31/2008 Provided By Mark Dashkewytch 780-963-5783 Report prepared for: Electricity Now Industry: 23821 - Electrical Contractors Revenue:

### Key Concepts and Skills. Standardized Financial. Chapter Outline. Ratio Analysis. Categories of Financial Ratios 1-1. Chapter 3

Key Concepts and Skills Chapter 3 Working With Financial Statements Know how to standardize financial statements for comparison purposes Know how to compute and interpret important financial ratios Know

### FINANCIAL MANAGEMENT

100 Arbor Drive, Suite 108 Christiansburg, VA 24073 Voice: 540-381-9333 FAX: 540-381-8319 www.becpas.com Providing Professional Business Advisory & Consulting Services Douglas L. Johnston, II djohnston@becpas.com

### Guide to Financial Statements Study Guide

Guide to Financial Statements Study Guide Overview (Topic 1) Three major financial statements: The Income Statement The Balance Sheet The Cash Flow Statement Objectives: Explain the underlying equation

### The ABCs of Financial Performance Measures and Benchmarks for Canada's Tourism Sector

The ABCs of Financial Performance Measures and Benchmarks for Canada's Tourism Sector Industry Financial Averages and Benchmarks for Canada's Tourism Operators Guide 6 The ABCs of Financial Performance

### Managerial Accounting Prof. Dr. Varadraj Bapat Department of School of Management Indian Institute of Technology, Bombay

Managerial Accounting Prof. Dr. Varadraj Bapat Department of School of Management Indian Institute of Technology, Bombay Lecture - 18 Financial Statements Analysis Dabur India Case Dear students, in last

### ACC 255 FINAL EXAM REVIEW PACKET (NEW MATERIAL)

Page 1 ACC 255 FINAL EXAM REVIEW PACKET (NEW MATERIAL) Complete these sample exam problems/objective questions and check your answers with the solutions at the end of the review file and identify where

### Guide to Financial Ratios Analysis A Step by Step Guide to Balance Sheet and Profit and Loss Statement Analysis

Guide to Financial Ratios Analysis A Step by Step Guide to Balance Sheet and Profit and Loss Statement Analysis By BizMove Management Training Institute Other free books by BizMove that may interest you: