1 Further Look At Financial Statements  Objective of financial reporting: provide info useful in making decisions To be useful information must be:  Relevant: do you care?  Reliable: can you count on it?  Comparable: to my foreign competitors?  Consistent: prepared same way last year?

2 Further Look At Financial Statements  Accounting constraints Materiality: does it matter?  Waste basket: asset or expense?  Same for every company? Conservatism:  Don’t overstate income or assets What about liability and expenses?

3 Further Look At Financial Statements  Uses of financial ratios Intracompany comprisons  Ford 2010 sales versus 2009 Intercompany comparisons  Wal-Mart versus Target profit margin Industry comparisons  McDonalds profit margin versus other restaraunts

4 Further Look At Financial Statements  Financial ratios Liquidity: can I pay my bills now?  Short-term creditors Solvency: can I pay my bills in the future?  Long-term creditors Profitability: am I making money?  Stockholders

5 Further Look At Financial Statements  Financial ratios Liquidity:  Current ratio: CA/CL What is current asset? Current liability?  Working capital: CA – CL  Quick: (CA – Inv)/CL Solvency  Debt: Debt/Assets  Free cash flow: Operating cash flow – capital expenditures – dividends Profitability:  ROA: Net income/Assets  ROE: Net income/Stockholders Equity  Profit Margin = Net Income / Sales

6 Further Look At Financial Statements  Depreciation Cost of asset / estimated useful life Guess Could property increase in value? Different amount on tax return? Not a cash expense Accumulated depreciation: total Cost – accumulated depreciation = ???