FINANCIAL ACCOUNTING A USER PERSPECTIVE Hoskin Fizzell Davidson Second Canadian Edition

Financial 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

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 Liabilities Current Assets = Current Ratio = $4,115,116 $2,294,778 = 1.79

Quick Ratio Current Liabilities Current Assets - Inventory - Prepaid Expenses = Quick Ratio = $4,115, ,050, ,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