FINANCIAL ACCOUNTING A USER PERSPECTIVE Hoskin Fizzell Davidson Second Canadian Edition.
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Transcript of FINANCIAL ACCOUNTING A USER PERSPECTIVE Hoskin Fizzell Davidson Second Canadian Edition.
FINANCIAL ACCOUNTINGFINANCIAL ACCOUNTINGA USER PERSPECTIVEA USER PERSPECTIVE
Hoskin • Fizzell • Davidson
Second Canadian Edition
Financial Statement AnalysisFinancial Statement Analysis
Chapter Twelve
Time-Series Analysis
• Examine information from different time period in the life of the company
• Look for patterns in the data over time
• Assumes that there is predictability in the time series
Cross-sectional Analysis
• Compares data from one company to another for the same time period
• Usually companies in the same industry are compared
Common Size Data
• Ability to compare the relationships between line items of differing dollar amounts (raw financial data)
• Statement of earnings– All line items are expressed as
percentages of net revenues
Common Size Statement of Earnings
1999 1998Gross revenue 100% 100%Cost of goods sold 90.6% 89.1%Earnings before other items 9.4% 10.6%
Ratios
• Explain relationships among data in the financial statements
• General categories– Performance
– Short-term liquidity
– Long-term liquidity
Performance Ratios
• Return on investment (ROI)– measures investment performance
• Return on equity (ROE)– shareholders’ perspective
• Return on assets (ROA)– measures investment in assets
Return on Assets
ROA
=
Net income + [Interest expense x (1-Tax rate)]
Average total assets
= Net income before interest
Average total assets
Return on Equity
ROE = Net income - Preferred dividends
Average common shareholders’ equity
Leverage
• Financial leverage– Some of the funds obtained to invest
in assets came from debtholders rather than from shareholders
• High leverage– larger proportion of debt to equity
Performance Ratios
• Turnover ratios– Accounts receivable
– Inventory
– Accounts payable
Accounts Receivable Turnover
Accounts receivable turnover
=Sales on account
Average accounts receivable
Days to collect
=365
Accounts receivable turnover
Inventory Turnover
Inventory turnover =
Cost of goods sold
Average inventory
Days inventory held
=365
Inventory turnover
Accounts Payable Turnover
Accounts payable turnover
=Credit purchases
Average accounts payable
Days to pay
=365
Accounts payable turnover
Short-Term Liquidity Ratios
• Current ratio
• Quick ratio
Current Ratio
Current RatioCurrent Liabilities
Current Assets=
Current Ratio =$4,115,116
$2,294,778= 1.79
Quick Ratio
Quick RatioCurrent Liabilities
Current Assets - Inventory - Prepaid Expenses
=
Quick Ratio =
$4,115,116 - 2,050,703 - 433,785
$2,294,778= .71
Long-Term Liquidity Ratios
• Debt-equity ratio
• Times interest ratio
Debt-Equity Ratio
Debt/Equity =Total liabilities + shareholders’ equity
Total liabilities
Times Interest Earned
Times interest earned
=Interest
Income before interest and taxes
Earnings Per Share
Basic earnings per share
=Weighted average number of common shares outstanding
Net income - Preferred dividends
Price/Earnings Ratio
Price/ earnings =
Earnings per share
Stock market price per share