3 - 1 Copyright (C) 2000 by Harcourt, Inc. All rights reserved. Chapter 3 Analysis of Financial Statements: Financial Statements and Reports Ratio Analysis.
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Copyright (C) 2000 by Harcourt, Inc. All rights reserved.
All rights reserved. Requests for permission to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt, Inc., 6277 Sea Harbor Drive, Orlando, Florida 32887-6777
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Copyright (C) 2000 by Harcourt, Inc. All rights reserved.
Financial Statements and Reports
The Income Statement
The Balance Sheet
Statement of Cash Flows
Statement of Retained Earnings
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Copyright (C) 2000 by Harcourt, Inc. All rights reserved.
Copyright (C) 2000 by Harcourt, Inc. All rights reserved.
Cash from OperationsOperating Activities Net income $ 44,220Add (sources of cash): Depreciation 20,000 Increase in A/P 29,600 Increase in accruals 4,000Subtract (uses of cash): Increase in A/R (50,800) Increase in inventories (120,800)
Net cash provided by operations ($ 73,780)
Computron: Statement of Cash Flows (2000)
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Copyright (C) 2000 by Harcourt, Inc. All rights reserved.
Cash from Investing Investment in fixed assets (36,000)Cash from Financing Increase in notes payable $ 25,000 Increase in long-term debt 101,180 Payment of cash dividends (22,000) Net cash from financing $ 104,180Net Change in Cash ($ 5,600)Plus: Cash at beginning of year 57,600Cash at end of year $ 52,000
Computron: Statement of Cash Flows (continued)
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Copyright (C) 2000 by Harcourt, Inc. All rights reserved.
What Can You Conclude about Computron’s Financial Condition from its Statement of Cash Flows?
Net operating cash flow is ($73,780) – Operations are draining cash
Had to borrow $126,180 in long- and short-term debt to cover cash outlays, pay for fixed asset additions, and to pay dividends
Despite borrowing, cash account still fell $5,600 in 2000
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Copyright (C) 2000 by Harcourt, Inc. All rights reserved.
Statement of Retained Earnings
Balance of retained earnings Dec. 31, 1999 $203,786
2000 Net Income 44,220
2000 dividends to stockholders (22,000)
Balance of retained earnings Dec. 31, 2000 $225,988
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Copyright (C) 2000 by Harcourt, Inc. All rights reserved.
Computron: Additional Data
2000 1999
Dec. 31 stock price $6.00 $8.50
Number of shares 100,000 100,000
Dividends per share $ 0.22 $ 0.22
Lease payments $40,000 $40,000
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Copyright (C) 2000 by Harcourt, Inc. All rights reserved.
Ratio Analysis
An analysis of a firm’s ratios is generally the first step in financial analysis
The ratios are designed to show relationships between financial statement accounts within firms and between firms
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What is the Purpose of Ratio Analysis?
Give idea of how well the company is doing
Standardize numbers; facilitate comparisons
Used to highlight weaknesses and strengths
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Copyright (C) 2000 by Harcourt, Inc. All rights reserved.
Liquidity:Liquidity: Can we make required payments?
Asset mgt.:Asset mgt.: Right amount of assets vs. sales?
Debt mgt.:Debt mgt.: Right mix of debt and equity?
Profitability:Profitability: Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA?
Market values:Market values: Do investors like what they see as reflected in P/E and M/B ratios?
What Are the Five Major Categories of Ratios?What Questions Do They Answer?
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Copyright (C) 2000 by Harcourt, Inc. All rights reserved.
Copyright (C) 2000 by Harcourt, Inc. All rights reserved.
Current ra xtio =Current assets
Current liabilities $1,$540.
.2902
239
Quick ratio =Current asset - Inventories
Current liabilities
What are Computron’s Current and Quick ratios?
$1, $836
$540..
290
20 84x
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Copyright (C) 2000 by Harcourt, Inc. All rights reserved.
Comment on Computron’s Liquidity Position
2000 1999 Industry
Current 2.4x 2.3x 2.7x
Quick 0.8x 0.8x 1.0x
Ratios held steady but slightly below ind. avg. Inventories are the least liquid of Computron’s
assets and they are the assets that suffer losses in the event of a forced sale.
The quick ratio shows that even if receivables are collected in full, Computron still needs to raise case from sale of inventories to meet obligations.
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Copyright (C) 2000 by Harcourt, Inc. All rights reserved.
Note that the $1,290,000 in current assets is made up of...
$ 52,000 in cash
$402,000 in accts rec
$836,000 in inventories
$1,290,000 total
Cur Lia - Cash - Acc Rec = Inventory needed to be liquidated to meet current liabilities
Thus, cur. lia minus cash = $540,200 - $52,000 = $488,200