Transcript Chapter 14
Chapter 14 To make informed decisions about a company Generally based on comparative financial data Copyright (c) 2009 Prentice Hall. All rights reserved. 2 Perform a horizontal analysis of financial statements Compares two financial statements to determine dollar and percentage changes ◦ Compute dollar changes Current year balance Prior year balance ◦ Compute percentage changes Dollar change Base period Prior year balance Copyright (c) 2009 Prentice Hall. All rights reserved. 4 Verifine Designs Comparative Income Statements Years ended December 31, 2011 and 2010 Net sales revenue Expenses: Cost of goods sold Selling and general expenses Other expense Total expenses Net Income 2011 $428,950 2010 $ 371,000 Dollar change $57,950 $ 203,850 99,350 6,750 $ 309,950 $119,000 $ 189,350 93,000 5,000 287,350 $83,650 $14,500 $6,350 $1,750 $22,600 $35,350 Percent change 15.6% 7.7% 6.8% 35.0% 7.9% 42.3% Copyright (c) 2009 Prentice Hall. All rights reserved. 5 Form of horizontal analysis Base year selected and set equal to 100% Any year $ Trend % Base year $ Copyright (c) 2009 Prentice Hall. All rights reserved. 6 Perform a vertical analysis of financial statements Shows relationship of each item to a base amount on financial statements Copyright (c) 2009 Prentice Hall. All rights reserved. 8 Prepare and use common-size financial statements Any Company Income Statement Year ended December 31, 2011 2011 Net sales revenue Expenses: Cost of goods sold Selling and general expenses Other expense Total expenses Net Income 100.0% 47.5% 23.2% 1.6% 72.3% 27.7% Copyright (c) 2009 Prentice Hall. All rights reserved. 10 Comparing a company with another leading company Copyright (c) 2009 Prentice Hall. All rights reserved. 11 Compute the standard financial ratios Ability to pay current liabilities Ability to sell inventory and collect receivables Measure profitability Ability to pay long-term debt Analyzing stock as an investment Copyright (c) 2009 Prentice Hall. All rights reserved. 13 Working capital Current ratio Acidtest ratio Copyright (c) 2009 Prentice Hall. All rights reserved. 14 Working Results in a capital dollar amount Current ratio Current assets Current liabilities Current assets Current liabilities Both result in a ratio Acid-test ratio Cash + short-term investments + net current receivables Current liabilities Copyright (c) 2009 Prentice Hall. All rights reserved. 15 Inventory turnover Accounts receivable turnover Days’sales-inreceivables Copyright (c) 2009 Prentice Hall. All rights reserved. 16 Inventory turnover Accounts receivable turnover The higher the turnover,Cost the quicker of it’s selling goods sold The higher the turnover,Net the credit quicker the collections sales Average inventory Average accounts receivable Copyright (c) 2009 Prentice Hall. All rights reserved. 17 Days’ sales in receivables Net sales Average net accounts receivable 365 Average day’s sales Average day’s sales Copyright (c) 2009 Prentice Hall. All rights reserved. 18 Current ratio ? Current assets Current liabilities $173,000 $129,000 Copyright (c) 2009 Prentice Hall. All rights reserved. 19 Acid-test ratio Cash + short-term investments + net current receivables Current liabilities $18,000 +10,000 + 53,000 $81,000 $129,000 $129,000 ? Copyright (c) 2009 Prentice Hall. All rights reserved. 20 Inventory turnover Cost of goods sold $319,000 $319,000 Average inventory $75,000 + 73,000 2 $74,000 ? Copyright (c) 2009 Prentice Hall. All rights reserved. 21 Copyright (c) 2009 Prentice Hall. All rights reserved. Days’ sales in receivables Net sales 365 Average day’s sales $463,000 365 $1,268 Average net accounts receivable $53,000 +75,000 2 Average day’s sales $1,268 $64,000 ? days 22 Debt ratio Times-interestearned ratio Copyright (c) 2009 Prentice Hall. All rights reserved. 23 Debt ratio Times interest earned Total liabilities Total assets Operating income Interest expense Copyright (c) 2009 Prentice Hall. All rights reserved. 24 Return on net sales Return on total assets Return on common stockholders’ equity Earnings per share Copyright (c) 2009 Prentice Hall. All rights reserved. 25 Return on sales Net income Net sales Net income + interest expense Return on assets Average total assets Copyright (c) 2009 Prentice Hall. All rights reserved. 26 Net income – preferred dividends Return on equity Average common equity Net income – preferred dividends Earnings per share Number of common shares outstanding Copyright (c) 2009 Prentice Hall. All rights reserved. 27 Trading on the equity Return on equity is greater than Return on assets Increases profits during good times Copyright (c) 2009 Prentice Hall. All rights reserved. 28 Price/earnings ratio (P/E) Dividend yield Book value Copyright (c) 2009 Prentice Hall. All rights reserved. 29 P/E ratio Dividend yield Book value Market price per share Earnings per share Dividends per share Common equity Market price per share Common shares outstanding Copyright (c) 2009 Prentice Hall. All rights reserved. 30 Suspect movement of sales, inventory, and receivables Earnings problems Decreased cash flow Too much debt Inability to collect receivables Inventory buildup Copyright (c) 2009 Prentice Hall. All rights reserved. 31