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Learning Goals
1.Review the contents of the stockholders report, and the procedures for consolidating financial statements. 2.Understand who uses financial ratios and how. 3.Use ratios to analyze a firms liquidity and activity. 4.Discuss the relationship between debt and financial leverage and the ratios used to analyze a firms debt.
Copyright 2003 Pearson Education, Inc.
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Learning Goals
5. Use ratios to analyze a firms profitability and its market value. 6. Use a summary of financial ratios and the DuPont system of analysis to perform a complete ratio analysis.
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The guidelines used to prepare and maintain financial records and reports are known as generally accepted accounting principles (GAAP). GAAP is authorized by the Financial Accounting Standards Board (FASB). Public corporations with more than $5 million in assets and more than 500 stockholders are required by the
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It describes:
the events considered to have the greatest impact on the firm during the year, and management philosophy, strategy, and plans for the coming year. The four key financial statements required by the SEC for reporting to shareholders are the income statement, balance sheet, statement of retained earnings, and statement of cash flows.
Copyright 2003 Pearson Education, Inc.
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FASB 52 mandated that U.S. based companies translate their foreign-currency denominated assets into dollars for consolidation with the parent companys financial statements. This is done by converting parent company foreign currency denominated assets and liabilities into dollars using the exchange rage prevailing at the fiscal hear ending date. Income statement items are usually treated similarly, but equity accounts are translated into dollars using the exchange rate that prevailed when the parent companys equity investment was made.
Copyright 2003 Pearson Education, Inc.
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cross-sectional analysis
Used to compare different firms at the same point in time
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cross-sectional analysis
industry comparative analysis One specific type of cross sectional analysis. Used to compare one firms financial performance to the industrys average performance
Copyright 2003 Pearson Education, Inc.
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Combined Analysis
Combined analysis simply uses a combination of both time series analysis and cross-sectional analysis
Copyright 2003 Pearson Education, Inc.
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Ratio Analysis
Liquidity Ratios
Current Ratio Current ratio = total current assets total current liabilities $1,233,000 = 1.97 $620,000
Current ratio
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Ratio Analysis
Liquidity Ratios
Current Ratio Quick Ratio
Quick ratio
Quick ratio
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Ratio Analysis
Liquidity Ratios Activity Ratios
Inventory Turnover Inventory Turnover = Cost of Goods Sold Inventory Inventory Turnover = $2,088,000 = 7.2 $289,000
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Ratio Analysis
Liquidity Ratios Activity Ratios
Average Collection Period ACP = Accounts Receivable Net Sales/360 ACP = $503,000 = 58.9 days $3,074,000/360
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Ratio Analysis
Liquidity Ratios Activity Ratios
Average Payment Period APP = Accounts Payable Annual Purchases/360 $382,000 = 94.1 days (.70 x $2,088,000)/360
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APP =
Ratio Analysis
Liquidity Ratios Activity Ratios
Total Asset Turnover Total Asset Turnover = Net Sales Total Assets
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Ratio Analysis
Liquidity Ratios Activity Ratios
Financial Leverage Ratios
Debt Ratio Debt Ratio = Total Liabilities/Total Assets Debt Ratio = $1,643,000/$3,597,000 = 45.7%
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Ratio Analysis
Liquidity Ratios Activity Ratios Leverage Ratios
Times Interest Earned Ratio Times Interest Earned = EBIT/Interest Times Interest Earned = $418,000/$93,000 = 4.5
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Ratio Analysis
Liquidity Ratios Activity Ratios Leverage Ratios
Fixed-Payment coverage Ratio (FPCR)
FPCR = EBIT + Lease Pymts
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Ratio Analysis
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Ratio Analysis
Liquidity Ratios Activity Ratios Leverage Ratios
Profitability Ratios
Common-Size Income Statements
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Ratio Analysis
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Ratio Analysis
Liquidity Ratios Activity Ratios Leverage Ratios
Profitability Ratios
Gross Profit Margin GPM = Gross Profit/Net Sales
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Ratio Analysis
Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios
Operating Profit Margin
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Ratio Analysis
Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios
Net Profit Margin
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Ratio Analysis
Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios
Return on Total Assets (ROA)
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Ratio Analysis
Liquidity Ratios Activity Ratios Leverage Ratios
Profitability Ratios
Return on Equity (ROE) ROE = Net Profits After Taxes/Stockholders Equity
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Ratio Analysis
Liquidity Ratios Activity Ratios Leverage Ratios
Profitability Ratios
Earnings Per Share (EPS) EPS = Earnings Available to Common Stockholders Number of Shares Outstanding
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Ratio Analysis
Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios Market Ratios
Price/Earnings (P/E) Ratio
P/E = Market Price Per Share of Common Stock Earnings Per Share P/E = $32.25/$2.90 = 11.1
Copyright 2003 Pearson Education, Inc.
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Ratio Analysis
Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios Market Ratios
Market/Book (M/B) Ratio
M/B = Market Price Per Share of Common Stock Book Value Per Share of Common Stock M/B = $32.25/$23.00 = 1.40
Copyright 2003 Pearson Education, Inc.
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