Financial Statements and Analysis Chapter 02 Financial Statements and Analysis

The Four Key Financial Statements The Four Key Financial Statements are: The Income Statement The Balance Sheet The Statement Of Retained earnings The Statement Of Cash Flows

Balance sheet Current assets Short term assets, expected to be converted into cash within 1 year or less Current Liabilities Short term liabilities expected to be paid within 1 year or less Long term debt Debt for which payment is not due in the current year Paid in capital in excess of par The amount of proceeds in excess of the par value received from the original sale of the common stock Retained earnings The cumulative total of all earnings, net of dividends that have retained and reinvested in the firm since its inception

Statement of Retained Earnings Statement of stockholder equity Shows all equity account transaction that occurred during the given year Statement of retained earnings Reconciled the net income earned during a given year, and any cash dividends paid, with the change in retained earnings between the start and the end of that year.

Barlett company statement of retained Earnings ($000) For the year ended December 31,2006 Retained earnings Balance (January1,2006) $1012 Plus: Net profits after taxes (for 2006) 231 less : Cash dividends (paid during the 2006) Preferred stock 10 Common stock 98 Total dividends paid 108 Retained earnings balance (Dec. 31, 2006) 1135

Exercises 2.1: Nowras began 2006 with a retained earnings balance of 928,000 OR. During 2006, the firm earned RO 377,000 after taxes. From this amount, preferred and common stock holders were paid RO 47,000 and RO 210,000 respectively in dividends. Required: prepared a statement of retained earning for the year ended 2006, for Nowras.

2.2: Lulu Hypermarket began 2008 with a retained earning balance of 900,000 OR. during 2008, the firm earned RO 377,000 after taxes. From this amount preferred and common stock holders are paid RO 50,000 and 150,000 respectively in dividends. Required: Prepared a statement of retained earning for the year ended 2006, for Lulu Hypermarket.

Question# 03; In year 2008, income statement of Omantel mention earning available to common stock holders is 600,000 OR and the number of shares outstanding is 320,000. Required: Calculate Earning per share to common stockholders

Statement of Cash Flow Provides a summary of the firm’s operating, investment and financing cash flows and reconciles them with the changes in its cash and marketable securities during the period.

Ratio Analysis (Financial) Ratio are used much in our daily life. We buys cars based o miles per gallon, we evaluate baseball players by earned run averages and batting averages. These all ratios are constructed to judge comparative performance. The analysis of financial statements based on the use of ratios or relative values. The basic inputs to ratio analysis are the firm’s income statement and the balance sheet.

Ratio Classification A. Profitability Ratio B. Liquidity Ratio Gross Margin Return on Equity Return on Total Asset C. Assets Utilization Ratio 6. Average Collection period 7. Average payment period 8. Inventory turnover. 9. Total Asset turnover 4. Current ratio. 5. Quick Ratio. D. Debt Utilization ratio 10. Debt to total Assets 11.Book value ratio Price earning ratio Times interest earn ratio

A. Profitability Ratios 1. Gross Profit margin = Sales – Cost of goods sold / Sales = Gross profits / sales = 3074,000 – 2088,000 / 3074,000 = 32.1% It represent the pure profits earned on each sales dollar

2. Return on common equity (ROE) = Earning available for common stockholders / Common stock equity = 250,000 / 391,000 = 63.5 % Higher this return, the better off are the owners. 3. Return on Total Asset = Earning Available for Common stockholders / Total assets = 221,000 / 4,653,000 = 4.74 % This Value indicates that the company earned 6.1 cents on each dollar.

B. Liquidity Ratio The liquidity of a firm is measured by its ability to satisfy its short term obligation as they come due. 1. Current ratio: Current ratio = Current assets / current liabilities = 1,223,000 / 620,000 = 1.97 2. Quick ratio: Quick ratio = Current assets – inventory / current liabilities = 1223,000 – 289,000 / 620,000 = 934,000 / 620,000 = 1.51

A measure the speed with which various accounts are converted into sales or cash inflows or out flows. 1.Inventory turnover = cost of goods sold / Inventory = 2,088,000 / 289,000 = 7.2 2. Average collection period = Accounts receivable / Average sales per day = Accounts receivable / Annual sales / 365 = 503,000 / 3074,000 / 365 = 59.7 days Activity ratio

3. Average payment period = Accounts payable / Average Ratio continue……. 3. Average payment period = Accounts payable / Average purchases per day = Accounts payable / Annual Purchases / 365 = 382,000 / 0.70 × 2088,000/365 = 382,000 / $4,004 = 95.4 days 4. Total Assets turnover = Sales / total Assets = 3074,000 / 4,653,000 = 0.67 times The total asset turnover indicates the efficiency with which firm uses its assets to generate sales.

Question # 01: The GMC financial statement shows annual sales of OR 1,200,000 account receivables of OR 250,000 Required: Calculate Average Collection Period Question# 02: The Suzuki company income statement shows cost of goods sold to 2050,000 and inventory RO.370,000 Required: Calculate inventory turnover ratio

Question # 03: The Carrefour income statement shows accounts payable of RO.250,000, the cost of goods is RO.1,050,000 and the purchases are 75% of the cost of the goods sold. Required: Calculate the Average payment period Question# 04: The GMC financial statement shows sales amounted to RO 2,050,000 and the total assets are RO 2,687,000. Required: Calculate total Asset turnover.

D. Debt Utilization Ratios The debt ratio measures the proportion of total assets financed by the firm’s creditors. 1.Debt ratio = Total liabilities / Total assets =1643,000 / 4,653,000 = 0.35 = 35 % This value indicates that the company has financed close to half of its assets with debt.

2. Time Interest Earned Ratio = Earning before interest and taxes / Interest = 453,000 / 93,000 = 4.87 times Measure the firm’s ability to make contractual interest payment. The higher its value, the better the firm is to fulfill its interest obligation

Market Ratios 3.Return on Common equity = Earnings Available for common stock holders / Common stock equity = 250,000 / 391,000 = 63.6% 4. Price / earning ratio = Market price per share of common stock / Earning per share = 32.25 / 3.34 = $ 9.65 This figure indicates that investor were paying $11.10 for each $1.00 of earning

Question#01:The Hayak shopping center financial statement shows Total Assets to RO 4,700,000 and total liabilities are RO 2,700,000 Required: Calculate Debt Ratio for Hayak shopping Center Question # 02: The Kia Motors financial Statement shows Sales amounted to RO 3,500,000 and cost of goods sold is RO 2,756,000 Required: Calculate Gross profit Margin

Question# 03: The Al Safeer financial statement shows operating profit amount to R0 5,894,500 and sales shows RO 98,679,000 Required: Calculate the operating profit margin Question# 04: The Toyota financial statement shows earning available to common stock holders to RO 1,572,000 and total assets are RO 9,654,000 Required: Calculate the Return on total Assets.

Question # 05: The Sultan center financial statement shows Earning available to common stock holders to RO 560,000 and common stock equity is RO 3,578,000 Required: Calculate Return on Equity

Book value ratio = Common stock equity / Number of shares of common stock outstanding = $391,000 / 75,000 = $ 5.21