Sei sulla pagina 1di 50

Chapter 2

Financial Statements and Analysis

Copyright 2009 Pearson Prentice Hall. All rights reserved.

The Four Key Financial Statements: The Income Statement The income statement provides a financial summary of a companys operating results during a specified period. Although they are prepared annually for reporting purposes, they are generally computed monthly by management.

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-2

The Four Key Financial Statements


Table 2.1 Bartlett Company Income Statements ($000)

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-3

The Four Key Financial Statements: The Balance Sheet The balance sheet presents a summary of a firms financial position at a given point in time. Assets indicate what the firm owns, equity represents the owners investment, and liabilities indicate what the firm has borrowed.

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-4

The Four Key Financial Statements


Table 2.2a Bartlett Company Balance Sheets ($000)

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-5

The Four Key Financial Statements (cont.)


Table 2.2b Bartlett Company Balance Sheets ($000)

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-6

The Four Key Financial Statements: Statement of Retained Earnings The statement of retained earnings reconciles the net income earned and dividends paid during the year, with the change in retained earnings.

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-7

The Four Key Financial Statements


Table 2.3 Bartlett Company Statement of Retained Earnings ($000) for the Year Ended December 31, 2009

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-8

The Four Key Financial Statements: Statement of Cash Flows The statement of cash flows provides a summary of the cash flows over the period of concern, typically the year just ended. This statement not only provides insight into a companys investment, financing and operating activities, but also ties together the income statement and previous and current balance sheets.
Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-9

The Four Key Financial Statements


Table 2.4 Bartlett Company Statement of Cash Flows ($000) for the Year Ended December 31, 2009

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-10

Consolidating International Financial Statements (cont.) Equity accounts, on the other hand, are translated into dollars by using the exchange rate that prevailed when the parents equity investment was made (the historical rate). Retained earnings are adjusted to reflect each years operating profits (or losses).

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-11

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-12

Using Financial Ratios: Interested Parties Ratio analysis involves methods of calculating and interpreting financial ratios to assess a firms financial condition and performance. It is of interest to shareholders, creditors, and the firms own management.

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-13

Using Financial Ratios: Types of Ratio Comparisons Trend or time-series analysis


Used to evaluate a firms performance over time

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-14

Using Financial Ratios: Types of Ratio Comparisons (cont.) Trend or time-series analysis

Cross-sectional analysis
Used to compare different firms at the same point in time

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-15

Using Financial Ratios: Types of Ratio Comparisons (cont.) Trend or time-series analysis

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 2009 Pearson Prentice Hall. All rights reserved.

2-16

Using Financial Ratios: Types of Ratio Comparisons (cont.) Trend or time-series analysis

Cross-sectional analysis
Benchmarking
A type of cross sectional analysis in which the firms ratio values are compared to those of a key competitor or group of competitors that it wishes to emulate

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-17

Using Financial Ratios: Types of Ratio Comparisons (cont.) Trend or time-series analysis

Cross-sectional analysis
Combined Analysis
Combined analysis simply uses a combination of both time series analysis and cross-sectional analysis

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-18

Using Financial Ratios: Types of Ratio Comparisons (cont.)


Table 2.5 Industry Average Ratios for Selected Lines of Businessa

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-19

Using Financial Ratios: Types of Ratio Comparisons (cont.)


Figure 2.1 Combined Analysis

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-20

Using Financial Ratios: Cautions for Doing Ratio Analysis


1. Ratios must be considered together; a single ratio by itself means relatively little.

2. Financial statements that are being compared should be dated at the same point in time.
3. Use audited financial statements when possible. 4. The financial data being compared should have been developed in the same way. 5. Be wary of inflation distortions.

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-21

Ratio Analysis Example


We will illustrate the use of financial ratios for analyzing financial statements using the Bartlett Company Income Statements and Balance Sheets presented earlier in Tables 2.1 and 2.2.

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-22

Ratio Analysis
Liquidity Ratios
Current Ratio

Current ratio

total current assets


total current liabilities

Current ratio

$1,233,000 = 1.97
$620,000

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-23

Ratio Analysis (cont.)


Liquidity Ratios
Current Ratio Quick Ratio Quick ratio = Total Current Assets - Inventory total current liabilities Quick ratio = $1,233,000 - $289,000 = 1.51 $620,000
Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-24

Ratio Analysis (cont.)


Liquidity Ratios Activity Ratios
Inventory Turnover Inventory Turnover = Cost of Goods Sold Inventory Inventory Turnover = $2,088,000 = 7.2 $289,000
Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-25

Ratio Analysis (cont.)


Liquidity Ratios Activity Ratios
Average Age of Inventory Average Age of Inventory = 365 Inventory Turnover Inventory Turnover = 365 = 50.7 days 7.2
Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-26

Ratio Analysis (cont.)


Liquidity Ratios Activity Ratios
Average Collection Period ACP = Accounts Receivable Net Sales/365 ACP = $503,000 $3,074,000/365
Copyright 2009 Pearson Prentice Hall. All rights reserved.

= 59.7 days

2-27

Ratio Analysis (cont.)


Liquidity Ratios Activity Ratios
Average Payment Period APP = Accounts Payable Annual Purchases/365 APP = $382,000 = 95.4 days (.70 x $2,088,000)/365
2-28

Copyright 2009 Pearson Prentice Hall. All rights reserved.

Ratio Analysis (cont.)


Liquidity Ratios Activity Ratios
Total Asset Turnover Total Asset Turnover = Net Sales Total Assets Total Asset Turnover = $3,074,000 = .85 $3,597,000
Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-29

Ratio Analysis (cont.)


Table 2.6 Financial Statements Associated with Pattys Alternatives

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-30

Ratio Analysis (cont.)


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%

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-31

Ratio Analysis (cont.)


Liquidity Ratios Activity Ratios Leverage Ratios Times Interest Earned Ratio
Times Interest Earned = EBIT/Interest Times Interest Earned = $418,000/$93,000 = 4.5
Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-32

Ratio Analysis (cont.)


Liquidity Ratios Activity Ratios Leverage Ratios
Fixed-Payment coverage Ratio (FPCR)
FPCR = EBIT + Lease Payments________________ Interest + Lease Pymts + {(Princ Pymts + PSD) x [1/(1-t)]} FPCR = $418,000 + $35,000 $93,000 + $35,000 + {($71,000 + $10,000) x [1/(1-.29)]}
Copyright 2009 Pearson Prentice Hall. All rights reserved.

= 1.9

2-33

Ratio Analysis (cont.)


Liquidity Ratios

Activity Ratios
Leverage Ratios

Profitability Ratios
Common-Size Income Statements

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-34

Ratio Analysis (cont.)


Table 2.7 Bartlett Company Common-Size Income Statements

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-35

Ratio Analysis (cont.)


Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios
Gross Profit Margin
GPM = Gross Profit/Net Sales GPM = $986,000/$3,074,000 = 32.1%
Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-36

Ratio Analysis (cont.)


Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios
Operating Profit Margin (OPM) OPM = EBIT/Net Sales
OPM = $418,000/$3,074,000 = 13.6%
Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-37

Ratio Analysis (cont.)


Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios
Net Profit Margin (NPM)

NPM = Earnings Available to Common Stockholders Sales NPM = $221,000/$3,074,000 = 7.2%


Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-38

Ratio Analysis (cont.)


Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios
Earnings Per Share (EPS)

EPS = Earnings Available to Common Stockholders Number of Shares Outstanding


EPS = $221,000/76,262 = $2.90
Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-39

Ratio Analysis (cont.)


Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios
Return on Total Assets (ROA)

ROA = Earnings Available to Common Stockholders Total Assets ROA = $221,000/$3,597,000 = 6.1%
Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-40

Ratio Analysis (cont.)


Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios
Return on Equity (ROE)

ROE = Earnings Available to Common Stockholders Total Equity ROE = $221,000/$1,754,000 = 12.6%
Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-41

Ratio Analysis (cont.)


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 2009 Pearson Prentice Hall. All rights reserved.

2-42

Ratio Analysis (cont.)


Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios Market Ratios
Market/Book (M/B) Ratio

BV/Share =

Common Stock Equity Number of Shares of Common Stock

BV/Share = $1,754,000/72,262 = $23.00


Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-43

Ratio Analysis (cont.)


Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios Market Ratios
Market/Book (M/B) Ratio

M/B Ratio = Market Price/Share of Common Stock Book Value/Share of Common Stock
M/B Ratio = $32.25/$23.00 = 1.40
Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-44

Summarizing All Ratios


Table 2.8 Summary of Bartlett Company Ratios (20072009, Including 2009 Industry Averages)

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-45

Summarizing All Ratios (cont.)


Table 2.8 Summary of Bartlett Company Ratios (20072009, Including 2009 Industry Averages)

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-46

DuPont System of Analysis


The DuPont system of analysis is used to dissect the firms financial statements and to assess its financial condition. It merges the income statement and balance sheet into two summary measures of profitability.

The Modified DuPont Formula relates the firms ROA to its ROE
using the financial leverage multiplier (FLM), which is the ratio of total assets to common stock equity:

ROA and ROE as shown in the series of equations on the following


slide and in Figure 2.2 on the following slide.

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-47

DuPont System of Analysis

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-48

DuPont System of Analysis (cont.)


Figure 2.2 DuPont System of Analysis

Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-49

Modified DuPont Formula (cont.)


Use of the FLM to convert ROA into ROE reflects the impact of financial leverage on the owners return. Substituting the values for Bartlett Companys ROA of 6.1 percent calculated earlier, and Bartletts FLM of 2.06 ($3,597,000 total assets $1,754,000 common stock equity) into the Modified DuPont formula yields:

ROE = 6.1% X 2.06 = 12.6%


Copyright 2009 Pearson Prentice Hall. All rights reserved.

2-50