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Chapter 12

Chapter 12. Financial Statement Analysis. Part A. Comparison of Financial Accounting Information. Under Armour . Under Armour. Under Armour. Nike. Under Armour. Industry. Comparison of Financial Accounting Information. LO1 Vertical Analysis.

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Chapter 12

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  1. Chapter 12 Financial Statement Analysis

  2. Part A Comparison of Financial Accounting Information

  3. Under Armour UnderArmour UnderArmour Nike UnderArmour Industry Comparison of Financial Accounting Information

  4. LO1 Vertical Analysis We express each item in a financial statement as a percentage of the same base amount

  5. Vertical Analysis

  6. LO2 Horizontal Analysis Analyze trends in financial statement data for a single company over time

  7. Horizontal Analysis

  8. Part B Using Ratios to assess Risk and Profitability

  9. LO3 Risk Analysis A company’s ability to pay its current liabilities A company’s ability to pay its long-term liabilities

  10. Common Mistake In comparing an income statement account with a balance sheet account, some students use the balance sheet account’s ending balance, rather than the average of its beginning and ending balances. Since income statement accounts are measured over a period of time, comparisons to related balance sheet accounts also need to be over time by taking the average of the beginning and ending points in time.

  11. Receivable Turnover Ratio Measures how many times, on average, a company collects its receivables during the year A company can quickly turn its receivables into cash HIGH RATIO

  12. Average Collection Period Converts the receivable turnover ratio into days The shorter the average collection period, the better. LOW RATIO

  13. Inventory Turnover Ratio Measures how many times, on average, a company sells its entire inventory during the year Inventory is selling more quickly, less cash is tied up in inventory, and the risk of outdated inventory is lower HIGH RATIO

  14. Average Days in Inventory Converts the inventory turnover ratio into days Companies try to minimize the number of days they hold inventory LOW RATIO

  15. Current Ratio Compares current assets to current liabilities A company has sufficient current assets to pay current liabilities as they become due HIGH RATIO

  16. Acid-Test Ratio Based on a more conservative measure of current assets available to pay current liabilities, the acid-test ratio provides a better indication of a company’s liquidity than does the current ratio A company has sufficient current assets (excluding inventories and prepaid expenses) to pay current liabilities as they become due HIGH RATIO

  17. Debt-to-Equity Ratio Compares liabilities to stockholders’ equity Lower debt compared to equity, results in lower risk of bankruptcy LOW RATIO

  18. Times Interest Earned Ratio Compares interest payments with a company’s income available to pay those charges Company generates enough income to cover its interest payments HIGH RATIO

  19. LO4 Profitability Analysis

  20. Gross Profit Ratio Indicates the portion of each dollar of sales above its cost of goods sold Higher the gross profit, the better it is HIGH RATIO

  21. Return on Assets Measures the income the company earns on each dollar invested in assets Higher the return on assets, the better it is HIGH RATIO

  22. Profit Margin Measures the income earned on each dollar of sales Higher the margin, the better it is HIGH RATIO

  23. Asset Turnover Measures sales volume in relation to the investment in assets Higher the sales for every dollar it invests in assets, the better it is HIGH RATIO

  24. Return on Equity Measures the income earned for each dollar in stockholders’ equity Higher the income earned for each dollar in stockholders’ equity, the better it is HIGH RATIO

  25. Price-Earnings Ratio Compares a company’s share price with its earnings per share Investors have high expectations of future earnings for the company HIGH RATIO

  26. Part C Earnings Persistence and Earnings Quality

  27. LO5 Earnings Persistence and One-Time Income Items Earnings Persistence One-Time Income Items Current earnings that will continue or persist into future years. Certain items are part of net income in the current year but are not expected to persist Discontinued operations Extraordinary items

  28. Discontinued Operations The sale or disposal of a significant component of a company’s operations

  29. Extraordinary Items An event that produces a gain or loss; and is (1) unusualin nature and (2) infrequentin occurrence.

  30. Other Revenues and Expenses

  31. LO6 Quality of Earnings The ability of reported earnings to reflect the company’s true earnings, as well as the usefulness of reported earnings to predict future earnings. Conservative Accounting Practices Aggressive Accounting Practices Result in reporting higher income, higher assets, and lower liabilities Result in reporting lower income, lower assets, and higher liabilities

  32. Financial Statements by Mr. Sampras

  33. Financial Statements by Mr. Sampras

  34. Financial Statements by Mr. Sampras

  35. Sampras Retired and McEnroe hired

  36. Sampras Retired and McEnroe hired

  37. Mr. McEnroe’s Financial Statements

  38. Mr. McEnroe’s Financial Statements

  39. Mr. McEnroe’s Financial Statements

  40. End of chapter 12

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