Chapter 13
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Transcript of Chapter 13
There are three types of comparisons to provide decision usefulness of financial information:
Intracompany basisIntercompany basisIndustry averages
Comparative Analysis
Intracompany basis – comparisons
within the company.
Intercompany basis – comparisons with other companies.
Industry averages – comparisons with other companies in the same industry.
Comparative Analysis
Financial Statement AnalysisThree basic tools are used in financial statement analysis :
1.Horizontal analysis2.Vertical analysis3.Ratio analysis
Horizontal Analysis
Is a technique for evaluating a series of financial statement data over a period of time.
Did an increase or decrease take place?
Pages 667 - 669
P1 – P0 P0
8,853.3 - 6,954.7 = 27.3%
6,954.7
Net sales for Kellogg company increased approximately 27.3% from 2000 to 2001.
Horizontal Analysis
Vertical AnalysisExpresses each item in a financial statement as a
percent of a base amount.
Total assets is the base amount on a balance sheet.
Common-size balance sheet
Net sales is the base amount on an income statement.
Common-size income statement
Pages 669 - 671
Five types:
Liquidity ratiosSolvency ratios Turnover ratios Profitability ratiosMarket value ratios
Ratio Analysis
Page 673
Liquidity Ratios
Measure the short-term ability of the enterprise to pay its maturing obligations and to meet unexpected needs for cash.
WHO CARES?Short-term creditors such as bankers and suppliers
Acid-Test Ratio
Indicates immediate short-term debt-paying ability
Current Assets - Inventory Current Liabilities
Solvency Ratios
Measure the ability of the enterprise to survive over a long period of time
WHO CARES?Long-term creditors and stockholders
Debt to Total Assets Ratio
Indicates % of total assets provided by creditors
Total Liabilities
Total Assets
Times Interest Earned Ratio
Indicates company’s ability to meet interest payments as they come due
_ EBIT _
Interest Expense
Cash Debt Coverage Ratio
Indicates long-term debt-paying ability (cash basis)
Cash provided by operations Average total liabilities
Turnover Ratios
Measure how efficiently, or intensively, a firm uses its assets to generate sales
WHO CARES?
Short-term creditors such as bankers and suppliers
Indicates liquidity of inventory and inventory management
365 days
Inventory Turnover Ratio
Average Days in Inventory
Average Collection Period
Indicates liquidity of receivables and collection success
365 daysReceivables Turnover
Profitability Ratios
Measure the income or operating success of an enterprise for a given period of time
WHO CARES? Everybody
WHY? A company’s income affects: its ability to obtain debt and equity financingits liquidity positionits ability to grow
Return On Assets
Reveals the amount of net income generated by each dollar invested
Net incomeAverage total assets
Return on Equity
Indicates profitability of common
stockholders’ investment
Net incomeAverage total equity
Earnings Per Share (EPS)
Indicates net income earned on each share of common stock sales
Net IncomeShares Outstanding
Price Earnings Ratio
Indicates relationship between market price per share and earnings per share
Stock PriceEarnings Per Share
Retention Ratio
Indicates % of earnings plowed back into the corporation.
Addition to Retained EarningsNet Income