chapter 10
DESCRIPTION
Chapter 10. Analysis of Financial Statements. General Accounting Principles. Reliability Understandability Comparability. Primary Financial Statements. The balance sheet enumerates Assets Liabilities Equity. Assets. Current: cash and equivalents, accounts receivable, and inventory - PowerPoint PPT PresentationTRANSCRIPT
Assets
• Current: cash and equivalents, accounts receivable, and inventory
• Long-term: land, buildings, machinery, and equipment
• Hidden assets
Equity
• Preferred stock
• Common stock
• Additional paid-in capital
• Retained earnings
• Book value
• Book value per share
The Income Statement
• Enumerates–Revenues–Expenses
• To determine–Income (earnings)–Earnings per share
Analysis of Cash Flow: Statement of Cash Flows
• Enumerates–sources of funds–uses of funds
• Determines change in the cash position
• Emphasis on the firm’s ability to generate cash
Limitations of Accounting Data
• Nonmeasureable items are excluded
• Aggregations
• Biased estimates of data
• Insufficient challenges by auditors
Depreciation
• Allocation of the cost of plant and equipment over time
• Non-cash expense
• Impact on taxes and cash flow
Depreciation
• Straight-line depreciation
–Equal allocation each year
• Accelerated depreciation
–Larger proportion during the early years
Modified Accelerated Cost Recovery System (MACRS)
• Asset classified by years
3, 5, 7, 10, 15, 20 years
• The half-year convention
Ratio Analysis
• Builds on a firm's financial statements
• Easy to understand
• Used by both equity investors and creditors
Ratio Analysis
• Facilitates Comparisons– Over time: time-series analysis– Across firms: cross-sectional
analysis
An Application of Ratio Analysis
• The following ratios use Pier I Imports 2002 financial statements
Quick Ratio
• (Current assets - inventory) / current liabilities
• ($605.1 - $275.4) / $208.4 = 1.58
Receivables Turnover
• Sales / accounts receivable
• $1,548.6 / $6,205 = 249.6
• Answer is not meaningful
Receivables Turnover
• For Southern Company
$10,155 / $1,132 = 8.97
• Interpretation: 8.97 is about nine times a year or every six weeks.
Average Collection Period(days sales outstanding)
• For Southern Company
• Accounts receivable / sales per day
• $1,132 / $28,208 = 40 days
Return on Common Equity
• Adjusts for preferred stock
• If no preferred, ratio is same as return on equity
DuPont System of Analysis
• Combines
–Net profit margin
–Turnover
–Leverage
• Helps identify source of weakness
Times-interest-earned
• Earnings before interest and taxes / interest
• $158,813 / $-184 = -863.1
• Interest earned exceeded interest paid.
Ratio Comparisons
• Ratios of firms within an industry– tend to have similar numerical values
– differences in numerical values are reasons for further analysis