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McGraw-Hill/Irwin Copyright 2010 by The McGraw-Hill Companies, Inc. All rights
Financial StatementFinancial Statement
AnalysisAnalysisChapter 14
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R e s u l ti n s t a n d a
m e a n i n
s u b t o t a
I t e m s w i t h
c h a r a c t e r i
g r o u p e d t
C l a s s i f i e
F i n a n c i a
S t a t e m e n
H e l p s i ds i g n i f i c
c h a n g e s
t r e n d s
A m o u n t s f
s e v e r a l y e
a p p e a r s i d e
C o m p a r
F i n a n c
S t a t e m e
P r e s e n t e dt h e t w o c o m
a r e a s i n g
b u s i n e s s
I n f o r m a t i o n
p a r e n t a n d s
a r e p r e s e n
C o n s o l i d
F i n a n c i
S t a t e m e
Financial Statements AreFinancial Statements Are
Designed for AnalysisDesigned for Analysis
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Dollar &
PercentageChanges
TrendPercentages
ComponentPercentages
Ratios
Tools of AnalysisTools of Analysis
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Dollar and PercentageDollar and Percentage
ChangesChanges
Dollar Change:
Analysis Period
Amount
Base Period
Amount
Dollar
Change =
Percentage Change:
Dollar ChangeBase Period
AmountPercentChange =
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Component PercentagesComponent Percentages
Examine the relative size of each item in the financialstatements by computing component
(or common-sized) percentages.
ComponentPercentage
100%Analysis Amount
Base Amount=
Financial Statement Base Amount
Balance Sheet Total Assets
Income Statement Revenues
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P a s t p e r f o
p r e s e n t p e
O t h e r c o m
y o u r c o m
A l o n g w i t h d o l l a r a n d
t r e n d p e r c e n t a g e s , a n d
r a t i o s c a n b e u s e d
A r a t i o i s a s i m p l e m a t
o f t h e r e l a t i o n s h i p b e t w
RatiosRatios
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CurrentRatio
Current AssetsCurrent Liabilities
=
= 1.55 : 1
This ratio measures theshort-term debt-payingability of the company.
This ratio measures theshort-term debt-payingability of the company.
Current RatioCurrent Ratio
CurrentRatio
$65,000
$42,000
=
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Quick assetsare cash, marketablesecurities, and receivables.
This ratio is like the current
ratio but excludes current assetssuch as inventories that may be
difficult to quickly convert into cash.
Quick AssetsCurrent Liabilities
=QuickRatio
Quick RatioQuick Ratio
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R a t i o s h e l pu n d e r s t a
f i n a n c i a l r e l
R a t i o s p r o vq u i c k c o m p
o f c o m p a n
U s e s
M a n a g e m e ni n t o t r a n s a c t
t o i m p r o v e t
R a t i o s d o n oa n a l y s i s o f t h
p r o g r e s s t
n o n f i n a n c i a
L i m i t a t i o
Uses and Limitations ofUses and Limitations of
Financial RatiosFinancial Ratios
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An income statement can be prepared in either amultiple-step or single-step format.
The single-step formatis simpler. The multiple-step
format provides more detailedinformation.
Measures of ProfitabilityMeasures of Profitability
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Earning Per ShareEarning Per Share
Net IncomeAverage Shares of Capital Stock Outstanding
= EPS
Look back at the information from Babson and get theLook back at the information from Babson and get thevalues we need to calculate earning per share.values we need to calculate earning per share.
$53,690$53,690
27,40027,400= $1.96= $1.96
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Price-Earnings RatioPrice-Earnings Ratio
Current Market Price of one Share of StockEarnings Per Share
= P/E
$15.25$15.25$1.96$1.96
= 7.78= 7.78
The measure shows us the relationship between earning
of the company and the market price of its stock.
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This ratio is a good measure ofthe efficiency of utilization of
assets by the business.
Return On InvestmentReturn On Investment
(ROI)(ROI)
Annual return (profit) from and investment
Average amount investedROI =
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Operating CycleOperating Cycle
Cash
InventoryAccounts
Receivable
1.PurchaseofMerchandise
2. Sale of merchandise on account
3.C
olle
ctio
nof
accou
ntsre
ceiv
able
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