FSA PPT Slides For Project

Chapter 5 The Analysis of Financial Statements
Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall 5-1
Objectives of Analysis
Objectives will vary depending on the:
perspective of the financial

statement user
specific questions that are

addressed by the analysis
Creditors
A creditor is concerned with the ability of an existing or prospective borrower to make interest and principal payments on borrowed funds. The questions raised by a creditor include:

What is the borrowing cause? What is the firms capital structure? What will be the source of debt repayment?
Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall
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Investors
An investor attempts to attach a value to the securities being considered for purchase or liquidation.
The questions raised by an investor include:

What is the companys performance record and future expectations? How much risk is inherent in the firms capital structure? How successfully does the firm compete in its industry?
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Management
Management must consider questions that creditors, investors, employees, the general public, regulators, and the financial press have.
Additional questions raised by a manager include:

How well has the firm performed and why? What are the strengths and weaknesses of the firms financial position? What changes should be implemented to improve future performance?
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Financial statements
provide insight into the
companys current status

policies and strategies for the future
lead to the development of
are prepared by management

Sources of Information

Analysis should begin with the financial statements and the notes to financial statements. Other resources include:
Proxy statement
Auditors report Management discussion and analysis Supplementary schedules Form 10-K and Form 10-Q Other sources
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Proxy Statement
Contains useful information about:
the board of directors
director and executive compensation

option grants audit-related matters
related party transactions

proposals to be voted on by shareholders
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Auditors Report
Contains the expression of opinion as to

the fairness of the financial statement presentation

Can be:
unqualified (presented fairly) qualified (suggests careful evaluation be made) unqualified opinion with explanatory language (should be reviewed carefully)
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Management Discussion and Analysis
Section of the annual report that is required and monitored by the SEC Includes facts and estimates not found elsewhere in the annual report Contains detailed coverage of the firms liquidity, capital resources, and operations Discloses favorable or unfavorable trends and significant events or uncertainties related to the historical or prospective financial condition and operations
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Supplementary Schedules
Certain schedules are required

for inclusion in the annual report
Frequently helpful to the

analysis
Form 10-K and Form 10-Q
Form 10-K is an annual document filed

with the SEC by companies that sell securities to the public.

Contains much of the same information as the annual report Shows additional detail that may be of interest
Form 10-Q is a less extensive document

filed quarterly with the SEC.
Other Sources
Computerized financial statement analysis packages General resources that provide comparative statistical ratios Free Internet sites Internet sites with subscription fees (often available through public and college libraries)
Web sites containing company profiles and stock prices

Articles from current periodicals
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Tools and Techniques

Common-size financial
statements Key financial ratios Trend analysis Structural analysis Industry comparisons Common sense and judgment
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Common-size financial statements
Express each account on the

balance sheet as a percentage of total assets
Express each account on the

income statement as a percentage of net sales

Sage Inc. Common-Size Balance Sheet (Exhibit 2.2, p. 50)
Inventories have become more dominant. Holdings of cash and cash equivalents have decreased. The firm has opened 43 new stores in the past two years. Buildings, leasehold improvements, equipment, and accumulated depreciation and amortization have increased as a percentage of total assets. Proportion of debt required to finance investments in assets has risen, primarily from long-term borrowings.
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Sage Inc. Common-Size Income Statement (Exhibit 3.3, p. 100)
Cost of goods sold percentage has increased slightly, resulting in a small decline in gross profit percentage. Depreciation and amortization have increased relative to sales. Selling and administrative expenses rose in 2011 but were controlled in 2012 and 2013 relative to overall sales. Profit percentages deteriorated through 2012 but rebounded in 2013.
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Key financial ratios standardize financial data in terms of mathematical relationships are expressed as percentages or times are extremely valuable have limitations

Key financial ratios
serve as screening devices indicate areas of potential

strength or weakness
reveal matters that need further

investigation
are not predictive


Key financial ratios should be used with caution and common sense should be used in combination with other elements of analysis should be evaluated and interpreted within the context of the particular firm, industry, and economic environment

Key financial ratios
Liquidity ratios
Activity ratios
Leverage ratios Profitability ratios Market ratios
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Key financial ratios Liquidity Ratios
Measure ability to meet cash needs

as they arise
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Key Financial Ratios Liquidity Ratios
Current Ratio Quick Ratio (Acid-Test Ratio) Cash Flow Liquidity Ratio Average Collection Period Days Inventory Held Days Payable Outstanding
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Current Ratio
Commonly used measure of the ability of a firm to meet its debt requirements as they come due Limited by its components Some analysts eliminate prepaid assets. Necessary to evaluate the trend of liquidity over a period of time and compare with industry competitors
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Quick Ratio (Acid-Test Ratio)
More rigorous test of short-run solvency than the current ratio Numerator eliminates inventory (the least liquid current asset and the most likely source of losses) Some analysts eliminate prepaid expenses. Necessary to evaluate the trend of liquidity over a period of time and compare with industry competitors
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Cash Flow Liquidity Ratio
Considers cash flow from operating activities Uses cash and marketable securities as an approximation of cash resources in the numerator of the ratio
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Average Collection Period
Average number of days required to convert receivables into cash Credit sales can be substituted for net sales.
Helps gauge the liquidity of account receivable

May provide information about credit policies Should be compared with the firms stated credit policies and the strength of the firm within its industry
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Days Inventory Held
Average number of days required to sell inventory to customers Measures efficiency of the firm in managing its inventory Type of industry is important in evaluating this ratio Necessary to check the cost flow assumption used to value inventory and cost of goods sold when making comparisons among firms
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Days Payable Outstanding
Average number of days it takes to pay

payables in cash
Offers insight into a firms pattern of

payments to suppliers
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Key Financial Ratios Cash Conversion Cycle Also called Net Trade Cycle Normal operating cycle of a firm that consists of:
buying or manufacturing inventory, with some purchases on credit

selling inventory, with some sales on credit collecting the cash
Helps the analyst understand why cash flow generation has changed
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Key Financial Ratios Cash Conversion Cycle
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Key financial ratios Activity Ratios
Measure liquidity of specific assets

and efficiency of managing assets
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Key Financial Ratios Activity Ratios
Accounts Receivable Turnover Inventory Turnover Accounts Payable Turnover Fixed Asset Turnover Total Asset Turnover
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Accounts Receivable Turnover
Measures how many times on average accounts receivable are collected in cash during the year Measures efficiency of a firms collection and credit policies
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Inventory Turnover
Measures how many times on average

inventory is sold during the year its inventory
Measures efficiency of a firm in managing
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Accounts Payable Turnover
Measures how many times on average

payables are paid during the year of payment to suppliers
Helps to gain insight into a firms pattern
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Fixed Asset Turnover
Assesses managements effectiveness in generating sales from investments in fixed assets Considers only the firms investment property, plant, and equipment
Extremely important for a capital-intensive firm

High ratio generally means only a small investment is required to generate sales (and thus the firm will be more profitable).
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Total Asset Turnover
Assesses managements effectiveness in generating sales from investments in assets Considers all assets High ratio generally means only a small investment is required to generate sales (and thus the firm will be more profitable).
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Key financial ratios Leverage Ratios
Measure the extent of financing with debt relative to equity and ability to cover interest and other fixed charges Use of debt provides a trade-off of risk and return Debt ratios do not present the whole picture with regard to risk.
Operating earnings must be sufficient to cover the associated fixed charges for debt to translate to leverage.
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Key Financial Ratios Leverage Ratios
Debt Ratio Long-Term Debt to Total Capitalization
Debt to Equity
Times Interest Earned Cash Interest Coverage Fixed Charge Coverage Cash Flow Adequacy
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Debt Ratio
Measures the extent of the firms financing

with debt
Considers the proportion of all assets that

are financed with debt
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Long-Term Debt to Total Capitalization
Measures the extent of the firms financing

with debt
Reveals the extent to which long-term debt

is used for the firms permanent financing
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Debt to Equity
Measures the extent of the firms financing with debt Measures the riskiness of the firms capital structure in terms of the relationship between the funds supplied by creditors (debt) and investors (equity)
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Times Interest Earned
Indicates how well operating earnings

cover fixed interest expenses
The higher the ratio, the better Can be misleading depending on cash flow
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Cash Interest Coverage
Measures how many times interest
payments can be covered by cash flow from operations before interest and taxes
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Fixed Charge Coverage
Broader measure of coverage capability than the times interest earned ratio Includes the fixed payments associated with leasing
Important for firms that operate extensively with operating leases
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Cash Flow Adequacy
Measures firms ability to cover capital expenditures, long-term debt payments, and dividends each year Defined differently by analysts
Operating cash flow should cover investing and financing activities.
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Key financial ratios Profitability Ratios Measure the overall performance of a firm and its efficiency in managing assets, liabilities, and equity
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Key Financial Ratios Profitability Ratios
Gross Profit Margin Operating Profit Margin
Net Profit Margin

Cash Flow Margin Return on Total Assets (ROA) Return on Equity (ROE) Cash Return on Assets
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Gross Profit Margin
Represents firms ability to translate sales dollars into profits Shows the relationship between sales and the cost of products sold Measures the ability to control costs of inventories or manufacturing and to pass along price increases through sales
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Operating Profit Margin
Represents firms ability to translate sales dollars into profits Measures overall operating efficiency Incorporates all expenses associated with ordinary business activities
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Net Profit Margin
Represents firms ability to translate sales

dollars into profits
Measures profitability after consideration

of all revenue and expense, including interest, taxes, and nonoperating items
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Cash Flow Margin
Measures ability to translate sales into

cash
Cash is needed to service debt, pay
dividends, and invest in new capital assets.
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Return on Total Assets (ROA)
Also called Return on Investment (ROI) Measures the overall efficiency of the firm in managing its total investment in assets Indicates the amount of profit earned relative to the level of investment in total assets
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Return on Equity (ROE)
Measures the overall efficiency of the firm

in generating return to shareholders
Calculated as return on common equity if a

firm has preferred stock outstanding
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Cash Return on Assets
Offers a useful comparison to return on investment Measures the firms cash-generating ability of assets
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Key financial ratios Market Ratios
Measure returns to stockholders and the value the marketplace puts on a companys stock Reporting of these numbers has a significant impact on stock price changes in the marketplace. Thorough analysis of a company, its environment, and its financial information offers a much better gauge of future prospects of the company than looking exclusively at these ratios.
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Key Financial Ratios Market Ratios
Earnings Per Common Share Price-to-Earnings (P/E) Ratio Dividend Payout Ratio Dividend Yield
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Earnings per Common Share
Provides the investor with a common

for publicly held companies
denominator to gauge investment returns
Must be disclosed on the income statement
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Price to Earnings (P/E) Ratio
Relates earnings per common share to the market price at which the stock trades, expressing the multiple that the stock market places on a firms earnings Function of a myriad of factors including quality of earnings, future earnings potential, and performance history
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Dividend Payout Ratio
Relates cash dividends per share to

earnings per share
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Dividend Yield
Shows the relationship between cash

dividends and market price
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Trend analysis
Requires the evaluation of

financial data over several accounting periods
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Structural analysis
Looks at the internal structure

of a business enterprise
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Industry comparisons
Relate one firm with averages

compiled for the industry in which it operates
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Analyzing the Data

There are five broad areas that would typically constitute a fundamental analysis of financial statements.
Background on the firm, industry, economy, and outlook Short-term liquidity Operating efficiency
Capital structure and long-term solvency

Profitability
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Analyzing the Data

Steps of a Financial Statement Analysis
1. Establish objectives of the analysis. 2. Study the industry in which firm operates and
relate industry climate to current and projected economic developments.

management.
3. Develop knowledge of the firm and the quality of
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Analyzing the Data

Steps of a Financial Statement Analysis
4. Evaluate financial statements
Tools: Common-size financial statements, key financial ratios, trend analysis, structural analysis, and comparison with industry competitors Major Areas: Short-term liquidity, operating efficiency, capital structure and long-term solvency, profitability, market ratios, segmental analysis (when relevant), and quality of financial reporting.
5. Summarize findings based on analysis and reach
conclusions about firm relevant to the established objectives.
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Analyzing the Data

Background: Economy, Industry, and Firm
Economic developments Actions of competitors
Environment in which the firm conducts business

Blending hard facts with guesses and estimates
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Analyzing the Data

Background Sage Inc.
Third largest retailer of recreational products in the United States Offers a broad line of sporting goods and equipment and active sports apparel in medium to higher price ranges to the general public Sells sporting goods on a direct basis to institutional customers such as schools and athletic teams General and executive offices are located in Dime Box, Texas.
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Analyzing the Data

Most retail stores occupy leased spaces and are located in major regional or suburban shopping districts throughout the southwestern United States. Eighteen new retail outlets were added in late 2012. Twenty-five new stores were opened in 2013.
The firm owns distribution center warehouses located in Arizona, California, Colorado, Utah, and Texas.
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Analyzing the Data

Recreational products industry is affected by current trends in:
consumer preferences
a cyclical sales demand

weather conditions
Most retail sales occur in November, December, May, and June.
Sales to institutions are highest in August and September.

Recreational product retailers rely heavily on sales of sportswear for profits.
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Analyzing the Data

Running boom has shifted to walking and aerobics.
Golf is increasing in popularity.

Competition within the industry is based on:

price quality and variety of goods offered location of outlets quality of services offered
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Analyzing the Data

Current outlook for sporting goods industry is promising, following a recessionary year in 2012. Americans have become increasingly aware of the importance of physical fitness and have become more involved in recreational activities. The 25 to 44 age group is the most athletically active and is projected to be the largest age group in the United States during the next decade. The southwestern United States is expected to increase in population.
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Analyzing the Data

Short-Term Liquidity Predicts future ability of the firm to meet prospective needs for cash Analysis of selected financial ratios Comparison of ratios to industry averages Important to creditors, suppliers, and management
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Analyzing the Data

Short-Term Liquidity Sage Inc.
Inventories have increased relative
to cash and cash equivalents. Increase in the proportion of debt, both short and long term Policies and financing needs related to new store openings Financial ratios are somewhat contradictory.
Analyzing the Data

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Analyzing the Data

Cash conversion cycle worsened from 2009 to 2012 but improved in 2013 due to an improvement in management of current assets and liabilities. Growth in inventories has been necessary to satisfy the requirements of opening new retail outlets.
Has been accomplished by reducing holdings of cash and cash equivalents
Efficient management of inventories in the future will be critical.

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Analyzing the Data

Problems in 2012 resulted from the depressed economy and poor ski conditions, which reduced sales growth and credit availability from suppliers. Easing of sales demand coincided with the beginning of major market expansion. Inventories and receivables increased too fast for limited sales growth of a recessionary year. Consequence was negative cash flow from operations in 2012.
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Analyzing the Data

In 2013, there was considerable
improvement in cash from operations and in managing of inventories and receivables. No major problem with short-term liquidity at present. Timing of future expansion of retail outlets will be of critical importance.
Analyzing the Data

Operating Efficiency
Turnover ratios measure

operating efficiency.
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Analyzing the Data

Operating Efficiency Sage Inc.
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Analyzing the Data

Operating Efficiency Sage Inc. Sage Inc. has increased its investment in fixed assets as a result of expansion. Asset turnover ratios reveal a downward trend in efficiency in generating sales from investments in fixed and total assets.
Efficiency should improve if expansion is successful.
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Analyzing the Data

Capital Structure and Long-Term Solvency
Amount and proportion of debt in a firms capital structure
Ability of the firm to service debt

Risk and leverage
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Analyzing the Data

Capital Structure and Long-Term Solvency Sage Inc.
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Analyzing the Data

Debt ratios reveal a steady increase in borrowed funds.
Given the degree of risk implied by borrowing, it is important to determine:

why debt has increased whether the firm is employing debt successfully how well the firm is covering its fixed charges
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Analyzing the Data

Capital Structure and Long-Term Solvency Sage Inc. Summary Statement of Cash Flows provides an explanation of borrowing cause:

Substantial increase in investment in capital assets, particularly in 2013
Investments financed largely by borrowing, especially in 2012
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Analyzing the Data

Calculation of the financial leverage index (FLI) provides insight into how effectively financial leverage is being used:

When the FLI is greater than 1, the firm is employing debt successfully. When the FLI is less than 1, the firm is not employing debt successfully.
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Analyzing the Data

Capital Structure and Long-Term Solvency Sage Inc. The calculation of the financial leverage index (FLI) is as follows:
Return on equity Financial leverage index * Adjusted return on assets

Net earnings interest expense (1 - tax rate) Total assets
* Adjusted return on assets
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Analyzing the Data

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Analyzing the Data

The FLI for Sage Inc. is above 1 in 2013,

2012, and 2011.
This indicates a successful use of
financial leverage for the three-year period when borrowing has increased.
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Analyzing the Data

A review of coverage ratios will reveal how well Sage Inc. is covering fixed charges:
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Analyzing the Data

Sage Inc. is generating enough cash to make cash payments. Since Sage Inc. leases the majority of its retail outlets, the fixed charge coverage ratio is more relevant than the times interest earned.

This ratio has decreased as a result of expansion and higher lease and interest payments. Although below industry average, Sage Inc. is covering all fixed charges by more than two times. This ratio should be monitored closely in the future, particularly if Sage Inc. continues to expand.
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Analyzing the Data

Cash flow adequacy ratio indicates the company does not generate enough cash from operations to cover capital expenditures, debt repayments, and cash dividends.
To improve this ratio, Sage Inc. needs to begin reducing accounts receivables and inventories. If expansion continues, cash flow adequacy will likely remain below 1.0.
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Analyzing the Data

Profitability
Analysis of how well the firm has
performed in terms of profitability Requires evaluation of several key ratios
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Analyzing the Data

Profitability Sage Inc.
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Analyzing the Data

Management adopted a new growth strategy.
Aggressive marketing
Opening of 18 new stores in 2012 and 25 in 2013
Strong cash generation from operations in 2013
Stable gross profit margin during expansion is a positive sign.
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Analyzing the Data

Stable gross profit margin during expansion is a positive sign.
Increase in operating profit margin is especially noteworthy.
Occurred during expansion (a period of sizable increases in operating expenses)
Net profit margin improved in spite of increased interest and tax expenses and a reduction in interest revenue from cash equivalents.
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Analyzing the Data

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Analyzing the Data

ROA, ROE, and cash return on assets declined through 2012 but rebounded in 2013.

ROA and ROE indicate Sage Inc. is able to generate profits. Cash return on assets indicates that Sage Inc. is able to generate cash from its investment and management strategies.
Sage Inc. is well positioned for future growth.
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Analyzing the Data

It will be important to monitor management of inventories.

Inventories account for half of total assets. Inventories have been problematic in the past.
Sage Inc. has financed much of its expansion with debt.
Thus far its shareholders have benefited from the use of debt through financial leverage.
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Analyzing the Data

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Analyzing the Data

Sage Inc. experienced negative cash flow from operation in 2012.

Necessary to monitor cash flow in the future. Occurred in a year of only modest sales and earnings growth.
Sales expanded rapidly in 2013 as the economy recovered and expansion began to pay off. The outlook is for continued economic recovery.
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Analyzing the Data

Relating the Ratios The DuPont System Evaluation of the interrelationship among individual ratios Indicates how a firms decisions and activities over the course of an accounting period interact to produce an overall return to shareholders
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Analyzing the Data

Relating the Ratios The DuPont System
Allows the analyst to:
identify strengths and weaknesses
trace potential causes of problems in financial condition and performance

evaluate whether changes in condition and performance are indicative of improvement, deterioration, or some combination focus on specific areas contributing to changes in condition and performance
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Analyzing the Data

Relating the Ratios The DuPont System
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Analyzing the Data

DuPont System Applied to Sage Inc.
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Analyzing the Data

DuPont System Applied to Sage Inc.
Return on equity has improved since 2012. Both profit margin and asset turnover are lower in 2013 than in 2009 and 2010. Combination of increased debt and improvement in profitability and asset utilization has produced an improved overall return in 2013.
The firm has added debt to finance capital asset expansion and has used its debt effectively.
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Analyzing the Data

DuPont System Applied to Sage Inc. Improvement in inventory management in 2013 improved total asset turnover. Ability to control operating costs while increasing sales during expansion has improved net profit margin. Overall return on investment is now improving as a result.
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Analyzing the Data

Projections and Pro Forma Statements Additional analytical tools for investment decisions and long-range planning include:

Earnings forecasts Pro forma financial statements
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Analyzing the Data

Pro Forma Statements
Projections of financial statements
based on a set of assumptions about:

future revenues
expenses level of investment in assets
financing methods and costs

working capital management
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Analyzing the Data

Summary of Analysis
Analysis of any firms financial statements consists of a mixture of interrelated steps and pieces. No one part of analysis should be interpreted in isolation. Last step of analysis is to integrate the separate pieces into a whole, leading to conclusions about the business enterprise. Conclusions will be affected by original objectives of analysis.
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Analyzing the Data

Summary of Analysis Sage Inc.
Strengths
Favorable economic and industry outlook; firm well-positioned geographically to benefit from expected economic and industry growth Aggressive marketing and expansion strategies Recent improvement in management of accounts receivable and inventory Successful use of financial leverage and solid coverage of debt service requirements
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Analyzing the Data

Strengths

Effective control of operating costs Substantial sales growth, partially resulting from market expansion and reflective of future performance potential
Increased profitability in 2013 and strong, positive generation of cash flow from operations
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Analyzing the Data

Weaknesses

Highly sensitive to economic fluctuations and weather conditions Negative cash flow from operating activities in 2012 Historical problems with inventory management and some weaknesses in overall asset management efficiency Increased risk associated with debt financing
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Analyzing the Data

Answers to specific questions regarding Sage Inc. are determined by the values placed on each of the strengths and weaknesses.
In general, the outlook for the firm is promising.

Sage Inc. appears to be a sound credit risk with attractive investment potential. The management of inventories, a continuation of effective cost controls, and careful timing of future expansion will be critically important to the firms future success.
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Appendix 5A: The Analysis of Segmental Data

FASB requires companies to
disclose supplementary financial data for each reportable segment including:

foreign operations, sales to major customers, and information for enterprises that have only one reportable segment.
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Segmental disclosures help the analyst
identify:

areas of strengths and weakness within a company, proportionate contribution to revenue and profit by each division, the relationship between capital expenditures and rates of return for operating areas, and segments that should be de-emphasized or eliminated.
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Information on segments is
presented as:

a supplementary section in the notes to the financial statements, part of the basic financial statements, or in a separate schedule that is referenced to and incorporated into the financial statements.
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Analytical tools used to assess segmental data include:
Percentage contribution to revenue Percentage contribution to operating profit Operating profit margin Capital expenditures Return on investment
An assessment of the relationship between the size of a division and its relative contribution
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Sporting gear and equipment continues
to be the largest revenue producer.
Sporting gear and equipment is
contributing more each year to total revenues.

relative contribution to total revenue. revenue each of the past three years.
Sporting apparel has increased its
Footwear has contributed less to
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Sporting gear and equipment was
the leading contributor to operating profit in 2013 and 2011. Sporting apparel contributed the most to operating profit in 2012. Footwear contributed the least to operating profit all three years.
It appears the firm has made strategic changes to remedy this challenge in 2013 (according to the MD&A).
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Sporting apparel produced the highest
profit margin in all three years.
Operating profit margin increased in
2013 in the sporting gear and equipment segment after a decline in 2012. has improved in 2013 after generating a negative operating profit margin in 2012.
Operating profit margin for footwear
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Increase in investment in sporting gear and equipment, especially in 2013
Increased revenues, operating profit, and operating profit margin Slightly higher operating profit margin in 2013 compared to 2012
Increased investment in the sporting apparel area
Significant investment in the footwear segment in 2011 and 2012

Did not result in better revenues or operating profit Decreased capital expenditures in this area in 2013
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Sporting apparel consistently
generates a solid ROI each year. Sporting gear and equipment generate significant (but decreasing) ROI.
Capital expenditures in 2013 were higher than in other segments.
This segment should be monitored to see if the increase in expenditures will result in higher returns.
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Sporting apparel is largest when considering total investment in assets.
This segment generates the highest operating profit margin and ROI with the least amount of capital expenditures required.
Footwear does not produce impressive operating profit or ROI for the significant capital expenditures allocated to the segment.
Sporting gear and equipment require the least investment in assets; however ROI is decreasing significantly.
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Operating Segment Definition
An operating segment is defined by FASB as a component of a business enterprise

that engages in business activities from which it may earn revenues and incur expenses whose operating results are regularly reviewed by the companys chief operating decision maker to make decisions about resources allocated to the segment and assess its performance for which discrete financial information is available
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Operating Segment Definition
A segment is considered to be
reportable if any one of three criteria is met:

Revenue is 10% or more of combined revenue, including intersegment revenue.
Operating profit (loss) is 10% or more of the greater of combined profit of all segments with profit or combined loss of all segments with loss. Segment assets exceed 10% or more of combined assets of all segments.
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Disclosure Requirements
The following information
must be disclosed according to FASB

General Information
Information about Profit or Loss

Information about Assets
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Copyright Notice
All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America.

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Chapter 5 The Analysis of Financial Statements

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall 5-1

perspective of the financial

specific questions that are

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

The questions raised by an investor include:

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Additional questions raised by a manager include:

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

provide insight into the

companys current status

lead to the development of

are prepared by management

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Contains useful information about:

the board of directors

director and executive compensation

related party transactions

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Contains the expression of opinion as to

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Certain schedules are required

Frequently helpful to the

Form 10-K is an annual document filed

Form 10-Q is a less extensive document

Web sites containing company profiles and stock prices

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Tools and Techniques

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Tools and Techniques

Express each account on the

Express each account on the

Tools and Techniques

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Tools and Techniques

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Tools and Techniques

Tools and Techniques

serve as screening devices indicate areas of potential

reveal matters that need further

are not predictive

Tools and Techniques

Tools and Techniques

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Tools and Techniques

Measure ability to meet cash needs

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Tools and Techniques

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Tools and Techniques

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Tools and Techniques

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Tools and Techniques

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Tools and Techniques

Helps gauge the liquidity of account receivable

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Tools and Techniques

Copyright 2013 Pearson Education, Inc. Publishing as Prentice Hall

Tools and Techniques