Kế toán, kiểm toán - Chapter 14: How well am i doing? Financial statement analysis

Chapter14“How Well Am I Doing?”Financial Statement AnalysisLimitations of Financial Statement AnalysisDifferences in accounting methods between companies sometimes make comparisons difficult.We use LIFO to value inventory.We use FIFO to value inventory.Limitations of Financial Statement AnalysisAnalysts should look beyond the ratios.Economic factorsConsumer tastesIndustry trendsTechnological changesChanges within the firmStatements in Comparative and Common-Size Form Dollar and percentage changes on statements Common-size statements RatiosAnalytical techniques used to examine relationships among financial statement itemsHorizontal Analysis Horizontal analysis shows the changes between years in the financial data in both dollar and percentage form.Horizontal AnalysisCalculating Change in Dollar AmountsDollarChangeCurrent YearFigureBase YearFigure=–PercentageChangeDollar Change Base Year Figure 100%=×Calculating Change as a Percentage2001 is the base year.Horizontal AnalysisInformation on the following slides illustrate a horizontal analysis of Clover, Co’s December 31, 2002 and 2001, comparative balance sheets and income statements.Horizontal AnalysisHorizontal Analysis($11,500 ÷ $23,500) × 100% = 48.9%$12,000 – $23,500 = $(11,500)Horizontal AnalysisHorizontal AnalysisLet’s move from the Balance Sheet to the Income Statement of Clover Co.Horizontal AnalysisHorizontal AnalysisSales increased by 8.3% yet net income decreased by 21.9%.Horizontal AnalysisThere were increases in both cost of goods sold (14.3%) and operating expenses (2.1%). These increased costs more than offset the increase in sales, yielding an overall decrease in net income.Trend AnalysisTrendPercentage Current Year Amount Base Year Amount100%=× Trend percentages state several years’ financial data in terms of a base year, which equals 100 percent. Trend AnalysisLook at the income information for Berry, Inc. for the years 2002 through 2006. We will do a trend analysis on these amounts to see what we can learn about the company.Trend AnalysisBerry, Inc.Income InformationFor the Years Ended December 31 The base year is 2002, and its amountswill equal 100%.Trend AnalysisBerry, Inc.Income InformationFor the Years Ended December 31 2003 Amount ÷ 2002 Amount × 100% ( $290,000 ÷ $275,000 ) × 100% = 105%( $198,000 ÷ $190,000 ) × 100% = 104%( $ 92,000 ÷ $ 85,000 ) × 100% = 108%Trend AnalysisTrends at Berry, Inc., indicated that cost of goods sold is increasing faster than sales, which is slowing the increase in gross margin.Berry, Inc.Income InformationFor the Years Ended December 31 Trend AnalysisWe can use the trend percentages to construct a graph so we can see the trend over time.Common-Size Statements Let’s take another look at the information from the comparative income statements of Clover Co. for 2002 and 2001. Common-size statements use percentages to express the relationship of individual components to a total within a single period. This is also known as vertical analysis.Common-Size StatementsNet sales is usually the base and is expressed as 100%.Common-Size Statements2001 COGS ÷ 2001 Net Sales × 100% ( $315,000 ÷ $480,000 ) × 100% = 65.6%2002 COGS ÷ 2002 Net Sales × 100% ( $360,000 ÷ $520,000 ) × 100% = 69.2%Gross Margin PercentageGross Margin PercentageGross Margin Sales= Gross profit percentage indicates how much of each sales dollar is left after deducting the cost of goods sold to cover operating expenses and a profit.Common-Size StatementsWhat conclusions can we draw?Let’s use the financial statements of Norton Corporation to complete a ratio analysis.Ratio Analysis – The Common Stockholder Use this information to calculate ratios to measure the well-being of the common stockholders of Norton Corporation.Earnings Per ShareIndicates how much income was earned for each share of common stock outstanding.Earningsper Share Net Income – Preferred Dividends Average Number of Common Shares Outstanding= $53,690 – $0 (17,000 + 27,400)/2== $2.42Earningsper SharePrice-Earnings RatioPrice-EarningsRatio Market Price Per Share Earnings Per Share=This measure is often used by investors as a general guideline in gauging stock values. Generally, the higher the price-earnings ratio, the more opportunity a company has for growth.Price-EarningsRatio $20.00 $2.42== 8.26 timesDividend Payout RatioGauges the portion of current earnings being paid out in dividends. Investors seeking current income would like this ratio to be large.DividendPayout Ratio Dividends Per Share Earnings Per Share=DividendPayout Ratio $2.00 $2.42== 82.6%Dividend Yield RatioDividendYield Ratio Dividends Per Share Market Price Per Share=Identifies the return, in terms of cash dividends, on the current market price of the stock.DividendYield Ratio $2.00 $20.00== 10.00%Return on Total AssetsMeasures how well assets have been employed.Return onTotal Assets$53,690 +[7,300 × (1 – 0.30)] ($300,000 + $346,390) ÷ 2== 18.19%Return onTotal AssetsNet Income + [Interest Expense × (1 – Tax Rate)]Average Total Assets=Return on Common Stockholders’ EquityReturn on CommonStockholders’ EquityNet Income – Preferred Dividends Average Stockholders’ Equity=Indicates how well the company employed the owners’ investments to earn income.Return on CommonStockholders’ Equity $53,690 – $0 ($180,000 + $234,390) ÷ 2== 25.91%Financial Leverage Financial leverage involves acquiring assets with funds at a fixed rate of interest.Return on investment in assets>Fixed rate of return on borrowed fundsPositive financial leverage=Return on investment in assets<Fixed rate of return on borrowed fundsNegative financial leverage=Book Value Per ShareMeasures the amount that would be distributed to holders of each share of common stock if all assets were sold at their balance sheet carrying amounts and if all creditors were paid off.= $ 8.55Book Value per Share$234,390 27,400=Book Value per Share Common Stockholders’ Equity Number of Common Shares Outstanding=Ratio Analysis – The Short-Term Creditor We will use this information to calculate ratios to measure the well-being of the short-term creditors for Norton Corporation.Working CapitalCurrent RatioCurrentRatio Current Assets Current Liabilities=CurrentRatio $65,000 $42,000==1.55 : 1Measures the ability of the company to pay currentdebts as they become due.Acid-Test (Quick) Ratio Quick Assets Current Liabilities=Acid-TestRatioThis ratio is like the current ratio but excludes current assets such as inventories that may be difficult to quickly convert into cash. $50,000 $42,000=1.19 : 1=Acid-TestRatioQuick assets are Cash,Marketable Securities, Accounts Receivable and current Notes Receivable.Accounts Receivable TurnoverMeasures how many times a company converts its receivables into cash each year.= 26.70 times $494,000 ($17,000 + $20,000) ÷ 2Accounts ReceivableTurnover= Sales on Account Average Accounts ReceivableAccounts ReceivableTurnover=Average Collection PeriodMeasures, on average, how many days it takes to collect an account receivable. Average Collection Period= 365 Days Accounts Receivable Turnover= 13.67 daysAverage Collection Period= 365 Days 26.7 TimesInventory Turnover Cost of Goods Sold Average InventoryInventoryTurnover=Measures the number of times merchandise inventory is sold and replaced during the year.= 12.73 times $140,000 ($10,000 + $12,000) ÷ 2InventoryTurnover=Average Sale PeriodMeasures how many days, on average, it takes to sell the inventory.= 28.67 daysAverage Sale Period= 365 Days 12.73 TimesAverage Sale Period= 365 Days Inventory TurnoverRatio Analysis – The Long-Term Creditor Use this information to calculate ratios to measure the well-being of the long-term creditors for Norton Corporation.Referred to as net operating income.Times Interest Earned RatioThe most common measure of the ability of a firm’s operations to provide protection to the long-term creditor.Times Interest Earned$84,0007,300==11.51 timesTimes Interest EarnedEarnings before interest and taxesInterest expense=Debt-to-Equity RatioMeasures the amount of assets being provided by creditors for each dollar of assets being provided by the owners of the company. $112,000 $234,390Debt–to–Equity Ratio== 0.48 to 1 Total Liabilities Stockholders’ EquityDebt–to–Equity Ratio=Published Sources of Financial RatiosEnd of Chapter 14