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Module 12

Module 12. Analyzing Financial Statements. Learning Objectives. Purpose of Analysis. Financial statement analysis helps users make better decisions. Internal Users. External Users. Shareholders Lenders Customers. Managers Officers Internal Auditors. Introductory Accounting.

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Module 12

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  1. Module 12 Analyzing Financial Statements

  2. Learning Objectives

  3. Purpose of Analysis Financial statement analysis helps users make better decisions. Internal Users External Users Shareholders Lenders Customers Managers Officers Internal Auditors Introductory Accounting SAP 2007 / SAP University Alliances

  4. Building Blocks of Analysis Ability to meet short-term obligations and to efficiently generate revenues 1. Liquidity and Efficiency 2. Solvency Ability to generate future revenues and meet long-term obligations Ability to provide financial rewards sufficient to attract and retain financing 3. Profitability 4. Market Ability to generate positive market expectations Introductory Accounting SAP 2007 / SAP University Alliances

  5. Standards for Comparison • Intracompany • Competitor • Industry • Guidelines

  6. Tools of Analysis

  7. Tools of Analysis Comparison of a company’s financial condition and performance to a base amount.

  8. Tools of Analysis Determination of key relations among financial statement items.

  9. Horizontal Analysis Time Introductory Accounting SAP 2007 / SAP University Alliances

  10. Horizontal Analysis Dollar Change Analysis Period Amount Base Period Amount = – Percent Change Dollar Change Base Period Amount = × 100% Introductory Accounting SAP 2007 / SAP University Alliances

  11. Illustration: Dollar and Percentage Change Assume a company’s year-end cash balances were $85,618 and $57,000 for 2005 and 2004 respectively. Dollar change = $85,618 - $57,000 = $28,618 $85,618 - $57,000 Percent change = x 100 $57,000 = 50.2%

  12. Trend Analysis Introductory Accounting SAP 2007 / SAP University Alliances

  13. Trend Percent Analysis Period Amount Base Period Amount × 100% = Trend Analysis Introductory Accounting SAP 2007 / SAP University Alliances

  14. Vertical or Common Size Analysis Introductory Accounting SAP 2007 / SAP University Alliances

  15. Common-Size Statements Common-size Percent Analysis Amount Base Amount × = 100% Financial StatementBase Amount Balance Sheet Total Assets Income Statement Revenues

  16. Ratio Analysis

  17. Liquidity and Efficiency Introductory Accounting SAP 2007 / SAP University Alliances

  18. Liquidity and Efficiency Measured by: Total asset turnover ratio

  19. Liquidity Working Capital = Current Assets - Current Liabilities

  20. Current Assets Current Liabilities Current Ratio = Liquidity

  21. Quick Assets* Current Liabilities Acid-Test Ratio = Liquidity *Cash, Short-Term Investments, Accounts Receivable, and Notes Receivable

  22. A/R Turnover Ratio = Liquidity Sales on Account Average Accounts Receivable

  23. Liquidity Days’ Sales Uncollected Accounts Receivable Net Sales x 365 =

  24. Liquidity MerchandiseTurnover Ratio Cost of Goods Sold Average Inventory =

  25. Liquidity Days’ Sales Uncollected Ending Inventory Cost of Sales x 365 =

  26. Efficiency Total Asset Turnover Net Sales (or Revenues) Average Total Assets =

  27. Solvency

  28. Solvency Total Liabilities Total Assets Debt Ratio = x 100

  29. Solvency Equity Ratio Total Shareholders’ Equity Total Assets = x 100

  30. Solvency Pledged assets to secured liabilities Book value of pledged assets Book value of secured liabilities =

  31. Solvency Times Interest Earned Income before Interest and Taxes Interest Expense =

  32. Profitability

  33. Profitability Profit Margin Net Income Net Sales (or Revenues) =

  34. Profitability Gross Profit Ratio Gross Profit from Sales Net Sales x 100 =

  35. Profitability Profit Margin Net Income Average Total Assets x 100 =

  36. Profitability Net income – Preferred Dividends Average common shareholders’ equity ROE = x 100

  37. Profitability Shareholders’ equity applicable to common shares Number of common shares outstanding Book value per common share =

  38. Profitability Basic Earnings Per Share Net Income – Preferred Dividends Weighted Average Common Shares Outstanding =

  39. Market

  40. Market Price–Earnings Ratio Market Price per Share Earnings per Share =

  41. Market Dividend Yield Annual Dividends per Share Market Price per Share =

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