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Financial StatementAnalysis
Chapter 13
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Learning Objective 1
Perform a horizontal analysis ofcomparative financial
statements.
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Horizontal Analysis
Study of percentage changes incomparative statements
1. Compute the dollar amount of the changefrom the base period to the later period.
2. Divide the dollar amount of change
by the base-period amount.
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Trend Percentages
Computed by selecting a baseyear whose amounts are set
equal to 100%.Trend % = Any year $ Base year $
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Learning Objective 2
Perform a vertical analysis offinancial statements.
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Vertical Analysis
Reveals the relationship of eachstatement item to a specified
base, which is the 100% figure.Every other item on the
financial statement is thenreported as a percentage of thatbase.
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Learning Objective 3
Prepare and use common-sizefinancial statements.
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Common-Size Statements
On a common-size incomestatement, each item is expressed
as a percentage of net sales.In the balance sheet, the common
size is total assets.
A common-size statement easesthe comparison of differentcompanies.
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Benchmarking
Practice of comparing acompany to other companies
Common-size statements arealso used to compare the
company to a specific company
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Learning Objective 4
Use the statement of cash flowsfor decisions.
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Statement of Cash Flows
Cash-flow signs of a healthycompany:
Operations are a major source ofcash.
Investing activities include morepurchases than sales of long-term
assets.Financing activities are not
dominated by borrowing.
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Learning Objective 5
Compute the standard financialratios.
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Ratio Classification
1. Measure ability to pay current liabilities
2. Measure ability to sell inventory and
collect receivables3. Measure ability to pay long-term debt
4. Measure profitability
5. Analyze stock as an investment
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Working Capital
Measures ability to pay currentliabilities with current assets
Current assets Current liabilities
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Current assets Current liabilities
Current Ratio
Measures companys ability topay current liabilities with
current assets
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(Cash + Short-term investments
+ Net current receivables) Current liabilities
Acid-Test Ratio
Shows the companys ability topay all current liabilities if they
come due immediately.
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Cost of goods sold Average inventory
Measuring Ability to Sell
InventoryInventory turnover measure of
the number of times the
average level of inventory issold during a year
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Net credit sales Average accounts receivable
Measuring Ability to
Collect ReceivablesAccounts receivable turnover
measures a companys ability to
collect cash from creditcustomers.
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One days sales = Net sales 365 days
Days sales in receivable =Avg net accounts receivable One days sales
Measuring Ability to
Collect ReceivablesDays sales in receivables ratio
measures how many days
sales remain in AccountsReceivable.
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Total liabilities Total assets
Measuring Ability to
Pay DebtThe debt ratio indicates the
proportion of assets financed
with debt.
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Income from operations Interest expense
Measuring Ability to
Pay DebtTimes-interest-earned ratio
measures the number of times
operating income can coverinterest expense.
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Net income Net sales
Measuring Profitability
Rate of return on net salesshows the percentage of each
sales dollar earned as netincome.
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(Net income + Interest expense)
Average total assets
Measuring Profitability
Rate of return on total assetsmeasures how profitably a
company uses its assets.
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Measuring Profitability
Rate of Return on CommonStockholders Equity:
Net income Preferred dividends Average common stockholders
equity
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Measuring Profitability
Earnings per share of commonstock
(Net income Preferred dividends) Number of shares of common
stock outstanding
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Objective 6
Use ratios in decision making
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Analyzing Stock Investments
Price/earning ratio - ratio of marketprice per share to earnings per share
Dividend yield - percentage of stocksmarket value returned as dividends tostockholders each period
Dividend per share of common stock Market price per share of common stock
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Analyzing Stock Investments
(Total stockholders equity Preferred equity) Number of shares of common
stock outstanding
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Book value per share ofcommon stock
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Learning Objective 7
Measure the economic valueadded by operations.
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Economic Value Added
Combines concepts ofaccounting income and corporate
finance to measure whether thecompanys operations haveincreased stockholder wealth.
EVA =Net income + Interest expense Capital charge
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Economic Value Added
Capital charge
Cost of capital
Notespayable
Loanspayable
Long-termdebt
Stockholdersequity
+ + +
=
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Economic Value Added
Capital charge - amount thatstockholders, lenders charge acompany for use of their money
Cost of capital weighted averageof the returns demanded bycompanys stockholders andlenders.
A positive EVA amount indicatesan increase in stockholder wealth
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End of Chapter 13