Financial Statements and Analysis

Chapter 2
Financial Statements and Analysis
Copyright 2009 Pearson Prentice Hall. All rights reserved.
The Four Key Financial Statements: The Income Statement The income statement provides a financial summary of a companys operating results during a specified period. Although they are prepared annually for reporting purposes, they are generally computed monthly by management.
2-2
The Four Key Financial Statements

Table 2.1 Bartlett Company Income Statements ($000)
2-3
The Four Key Financial Statements: The Balance Sheet The balance sheet presents a summary of a firms financial position at a given point in time. Assets indicate what the firm owns, equity represents the owners investment, and liabilities indicate what the firm has borrowed.
2-4

Table 2.2a Bartlett Company Balance Sheets ($000)
2-5
The Four Key Financial Statements (cont.)

Table 2.2b Bartlett Company Balance Sheets ($000)
2-6
The Four Key Financial Statements: Statement of Retained Earnings The statement of retained earnings reconciles the net income earned and dividends paid during the year, with the change in retained earnings.
2-7

Table 2.3 Bartlett Company Statement of Retained Earnings ($000) for the Year Ended December 31, 2009
2-8
The Four Key Financial Statements: Statement of Cash Flows The statement of cash flows provides a summary of the cash flows over the period of concern, typically the year just ended. This statement not only provides insight into a companys investment, financing and operating activities, but also ties together the income statement and previous and current balance sheets.
2-9

Table 2.4 Bartlett Company Statement of Cash Flows ($000) for the Year Ended December 31, 2009
2-10
Consolidating International Financial Statements (cont.) Equity accounts, on the other hand, are translated into dollars by using the exchange rate that prevailed when the parents equity investment was made (the historical rate). Retained earnings are adjusted to reflect each years operating profits (or losses).
2-11
2-12
Using Financial Ratios: Interested Parties Ratio analysis involves methods of calculating and interpreting financial ratios to assess a firms financial condition and performance. It is of interest to shareholders, creditors, and the firms own management.
2-13
Using Financial Ratios: Types of Ratio Comparisons Trend or time-series analysis

Used to evaluate a firms performance over time
2-14
Using Financial Ratios: Types of Ratio Comparisons (cont.) Trend or time-series analysis
Cross-sectional analysis
Used to compare different firms at the same point in time
2-15
Industry comparative analysis
One specific type of cross sectional analysis. Used to compare one firms financial performance to the industrys average performance
2-16
Benchmarking
A type of cross sectional analysis in which the firms ratio values are compared to those of a key competitor or group of competitors that it wishes to emulate
2-17
Combined Analysis
Combined analysis simply uses a combination of both time series analysis and cross-sectional analysis
2-18
Using Financial Ratios: Types of Ratio Comparisons (cont.)

Table 2.5 Industry Average Ratios for Selected Lines of Businessa
2-19
Using Financial Ratios: Types of Ratio Comparisons (cont.)

Figure 2.1 Combined Analysis
2-20
Using Financial Ratios: Cautions for Doing Ratio Analysis

1. Ratios must be considered together; a single ratio by itself means relatively little.
2. Financial statements that are being compared should be dated at the same point in time.
3. Use audited financial statements when possible. 4. The financial data being compared should have been developed in the same way. 5. Be wary of inflation distortions.
2-21
Ratio Analysis Example

We will illustrate the use of financial ratios for analyzing financial statements using the Bartlett Company Income Statements and Balance Sheets presented earlier in Tables 2.1 and 2.2.
2-22
Ratio Analysis
Liquidity Ratios
Current Ratio
Current ratio
total current assets

total current liabilities
Current ratio
$1,233,000 = 1.97
$620,000
2-23
Ratio Analysis (cont.)

Liquidity Ratios
Current Ratio Quick Ratio Quick ratio = Total Current Assets - Inventory total current liabilities Quick ratio = $1,233,000 - $289,000 = 1.51 $620,000
2-24

Liquidity Ratios Activity Ratios
Inventory Turnover Inventory Turnover = Cost of Goods Sold Inventory Inventory Turnover = $2,088,000 = 7.2 $289,000
2-25

Average Age of Inventory Average Age of Inventory = 365 Inventory Turnover Inventory Turnover = 365 = 50.7 days 7.2
2-26

Average Collection Period ACP = Accounts Receivable Net Sales/365 ACP = $503,000 $3,074,000/365
= 59.7 days
2-27

Average Payment Period APP = Accounts Payable Annual Purchases/365 APP = $382,000 = 95.4 days (.70 x $2,088,000)/365
2-28

Total Asset Turnover Total Asset Turnover = Net Sales Total Assets Total Asset Turnover = $3,074,000 = .85 $3,597,000
2-29

Table 2.6 Financial Statements Associated with Pattys Alternatives
2-30

Liquidity Ratios Activity Ratios Financial Leverage Ratios
Debt Ratio Debt Ratio = Total Liabilities/Total Assets Debt Ratio = $1,643,000/$3,597,000 = 45.7%
2-31

Liquidity Ratios Activity Ratios Leverage Ratios Times Interest Earned Ratio
Times Interest Earned = EBIT/Interest Times Interest Earned = $418,000/$93,000 = 4.5
2-32

Liquidity Ratios Activity Ratios Leverage Ratios
Fixed-Payment coverage Ratio (FPCR)
FPCR = EBIT + Lease Payments________________ Interest + Lease Pymts + {(Princ Pymts + PSD) x [1/(1-t)]} FPCR = $418,000 + $35,000 $93,000 + $35,000 + {($71,000 + $10,000) x [1/(1-.29)]}
= 1.9
2-33

Liquidity Ratios
Activity Ratios
Leverage Ratios
Profitability Ratios
Common-Size Income Statements
2-34

Table 2.7 Bartlett Company Common-Size Income Statements
2-35

Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios
Gross Profit Margin
GPM = Gross Profit/Net Sales GPM = $986,000/$3,074,000 = 32.1%
2-36

Operating Profit Margin (OPM) OPM = EBIT/Net Sales
OPM = $418,000/$3,074,000 = 13.6%
2-37

Net Profit Margin (NPM)
NPM = Earnings Available to Common Stockholders Sales NPM = $221,000/$3,074,000 = 7.2%

2-38

Earnings Per Share (EPS)
EPS = Earnings Available to Common Stockholders Number of Shares Outstanding

EPS = $221,000/76,262 = $2.90
2-39

Return on Total Assets (ROA)
ROA = Earnings Available to Common Stockholders Total Assets ROA = $221,000/$3,597,000 = 6.1%
2-40

Return on Equity (ROE)
ROE = Earnings Available to Common Stockholders Total Equity ROE = $221,000/$1,754,000 = 12.6%
2-41

Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios Market Ratios
Price Earnings (P/E) Ratio
P/E = Market Price Per Share of Common Stock Earnings Per Share
P/E = $32.25/$2.90 = 11.1
2-42

Market/Book (M/B) Ratio
BV/Share =
Common Stock Equity Number of Shares of Common Stock
BV/Share = $1,754,000/72,262 = $23.00

2-43

Market/Book (M/B) Ratio
M/B Ratio = Market Price/Share of Common Stock Book Value/Share of Common Stock
M/B Ratio = $32.25/$23.00 = 1.40
2-44
Summarizing All Ratios

Table 2.8 Summary of Bartlett Company Ratios (20072009, Including 2009 Industry Averages)
2-45
Summarizing All Ratios (cont.)

Table 2.8 Summary of Bartlett Company Ratios (20072009, Including 2009 Industry Averages)
2-46
DuPont System of Analysis

The DuPont system of analysis is used to dissect the firms financial statements and to assess its financial condition. It merges the income statement and balance sheet into two summary measures of profitability.
The Modified DuPont Formula relates the firms ROA to its ROE
using the financial leverage multiplier (FLM), which is the ratio of total assets to common stock equity:
ROA and ROE as shown in the series of equations on the following

slide and in Figure 2.2 on the following slide.
2-47
DuPont System of Analysis
2-48
DuPont System of Analysis (cont.)

Figure 2.2 DuPont System of Analysis
2-49
Modified DuPont Formula (cont.)

Use of the FLM to convert ROA into ROE reflects the impact of financial leverage on the owners return. Substituting the values for Bartlett Companys ROA of 6.1 percent calculated earlier, and Bartletts FLM of 2.06 ($3,597,000 total assets $1,754,000 common stock equity) into the Modified DuPont formula yields:
ROE = 6.1% X 2.06 = 12.6%

2-50

Financial Statements and Analysis

Enviado por

Dados do documento

Descrição original:

Título original

Direitos autorais

Formatos disponíveis

Compartilhar este documento

Compartilhar ou incorporar documento

Opções de compartilhamento

Você considera este documento útil?

Este conteúdo é inapropriado?

Direitos autorais:

Formatos disponíveis

Financial Statements and Analysis

Enviado por

Direitos autorais:

Formatos disponíveis

Chapter 2

Financial Statements and Analysis

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Copyright 2009 Pearson Prentice Hall. All rights reserved.

The Four Key Financial Statements

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Copyright 2009 Pearson Prentice Hall. All rights reserved.

The Four Key Financial Statements

Copyright 2009 Pearson Prentice Hall. All rights reserved.

The Four Key Financial Statements (cont.)

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Copyright 2009 Pearson Prentice Hall. All rights reserved.

The Four Key Financial Statements

Copyright 2009 Pearson Prentice Hall. All rights reserved.

The Four Key Financial Statements

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Using Financial Ratios: Types of Ratio Comparisons Trend or time-series analysis

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Using Financial Ratios: Types of Ratio Comparisons (cont.)

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Using Financial Ratios: Types of Ratio Comparisons (cont.)

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Using Financial Ratios: Cautions for Doing Ratio Analysis

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Ratio Analysis Example

Copyright 2009 Pearson Prentice Hall. All rights reserved.

total current assets

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Ratio Analysis (cont.)

Ratio Analysis (cont.)

Ratio Analysis (cont.)

Ratio Analysis (cont.)

Ratio Analysis (cont.)

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Ratio Analysis (cont.)

Ratio Analysis (cont.)

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Ratio Analysis (cont.)

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Ratio Analysis (cont.)

Ratio Analysis (cont.)

Ratio Analysis (cont.)

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Ratio Analysis (cont.)

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Ratio Analysis (cont.)

Ratio Analysis (cont.)

Ratio Analysis (cont.)

NPM = Earnings Available to Common Stockholders Sales NPM = $221,000/$3,074,000 = 7.2%

Ratio Analysis (cont.)

EPS = Earnings Available to Common Stockholders Number of Shares Outstanding

Ratio Analysis (cont.)

Ratio Analysis (cont.)

Ratio Analysis (cont.)

Ratio Analysis (cont.)