Chapter 2 Financial Statements and Analysis تحليل القوائم المالية

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 2-2 Learning Goals 1.Review the contents of the stockholders’ report and the procedures for consolidating international financial statements. مراجعة محتويات تقرير المساهمين وإجراءات تجميع او توحيد القوائم المالية الدولية 2.Understand who uses financial ratios, and how. فهم من يستخدم النسب المالية وكيفية الاستخدام 3.Use ratios to analyze a firm’s liquidity and activity. استخدام النسب لتحليل درجة سيولة وأنشطة الشركة 4.Discuss the relationship between debt and financial leverage and the ratios used to analyze a firm’s debt. مناقشة العلاقة بين الدين والرافعة المالية والنسب المستخدم لتحليل دين الشركة

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 2-3 Learning Goals (cont.) 5.Use ratios to analyze a firm’s profitability and market value. استخدام النسب المالية لتحليل الربحية والقيمة السوقية للشركة 6.Use a summary of financial ratios and the DuPont system of analysis to perform a complete ratio analysis. استخدام ملخص النسب المالية ونظام دوبونت للتحليل من أجل عمل تحليل مالي شامل ومتكامل.

2-4 The Stockholders’ Report The guidelines used to prepare and maintain financial records and reports are known as generally accepted accounting principles (GAAP). من المعروف أن المبادئ التوجيهية المستخدمة في إعداد ومسك السجلات والتقارير المالية تعرف بالمبادئ المحاسبية المقبولة قبولا عاماُ GAAP is authorized by the Financial Accounting Standards Board (FASB) المبادئ المحاسبية المتعارف عليها اجيزت من قبل مجلس معايير المحاسبة المالية The Sarbanes-Oxley Act of 2002, passed to eliminate the many disclosure and conflict of interest problems of corporations, established the Public Company Accounting Oversight Board (PCAOB), which is a not-for-profit corporation that overseas auditors. قانون سربنس اوكسلي نجح في تجاهل العديد من مشاكل تعارض المصالح والافصاحات للشركات، وأسس مجلس اشراف محاسبي للشركات العامة الغير هادفة للربح والتي تتولي الاشراف على المدققين الخارجيين.

2-5 The Stockholders’ Report (cont.) The PCAOB is charged with protecting the interests of investors and furthering the public interest in the preparation of informative, fair, and independent audit reports. المجلس الاشرافي تم اتهامه بحماية وتعزيز مصالح المستثمرين والمصالح العامة عند اعداد تقرير المراجع المستقل والعادل والمعلوماتي. Public corporations with more than $5 million in assets and more than 500 stockholders are required by the SEC to provide their stockholders with an annual stockholders report. شركات المساهمة العامة والتي أصولها 5 مليون دولار و يزيد عدد مساهميها عن 500 شخص مطالبة من قبل لجنة بورصة الأوراق المالية بأن يزود مساهمين الشركات بتقارير سنوي

2-6 The Four Key Financial Statements: الأربعة قوائم المالية الرئيسية The Income Statement قائمة الدخل The income statement provides a financial summary of a company’s operating results during a specified period. قائمة الدخل هي قائمة تعطي ملخص عن نتائج تشغيل الشركة خلال فترة زمنية محددة. Although they are prepared annually for reporting purposes, they are generally computed monthly by management and quarterly for tax purposes. على الرغم أن التقارير المالية تعد سنويا لأغراض التقرير والافصاح هي عادة تحسب بشكل شهري من قبل الإدارة وبشكل فصلي للأغراض الضريبية.

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 2-7

2-8 The Four Key Financial Statements: The Balance Sheet الميزانية العمومية The balance sheet presents a summary of a firm’s financial position at a given point in time. الميزانية العمومية تعرض ملخص عن الوضع المالي للشركات عند نقطة زمنية معينة. Assets indicate what the firm owns, equity represents the owners’ investment, and liabilities indicate what the firm has borrowed. الأصول هي ما تمتلكه الشركة وحقوق الملكية هي استثمارات الملاك والالتزمات تشير الي ما قامن الشركة باستدانته.

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 2-9 The Four Key Financial Statements

Copyright © 2006 Pearson Addison-Wesley. All rights reserved The Four Key Financial Statements (cont.)

Copyright © 2006 Pearson Addison-Wesley. All rights reserved The Four Key Financial Statements: Statement of Retained Earnings قائمة الأرباح المحتجزة The statement of retained earnings reconciles the net income earned and dividends paid during the year, with the change in retained earnings. قائمة الأرباح المحتجزة توضح صافي الدخل المكتسب وتوزيعات الأرباح المدفوعة خلال سنة مالية والتغيرات في حقوق الملكية.

Copyright © 2006 Pearson Addison-Wesley. All rights reserved The Four Key Financial Statements

2-13 The Four Key Financial Statements: Statement of Cash Flows قائمة التدفقات النقدية The statement of cash flows provides a summary of the cash flows over the period of concern, typically the year just ended. قائمة التدفقات النقدية تعطي ملخص عن التدفقات النقدية خلال الفترة ذات العلاقة عادة تكون السنة المالية فقط. This statement not only provides insight into a company’s investment, financing and operating activities, but also ties together the income statement and previous and current balance sheets هذه القائمة لا توفر فقط نظرة على الأنشطة الاستثمارية والتمويلية والتشغيلية للشركة، ولكن أيضا تربط قائمة الدخل والميزانية العمومية السابقة والحالية.

Copyright © 2006 Pearson Addison-Wesley. All rights reserved The Four Key Financial Statements

2-15 Consolidating International Financial Statements توحيد القوائم المالية الدولية FASB 52 mandated that U.S. based companies translate their foreign-currency denominated assets and liabilities into dollars using the current rate (translation) method. Under the translation method, companies translate all foreign-currency-denominated assets and liabilities into dollars at the exchange rate prevailing at the fiscal year ending date (the current rate). Income statement items are usually treated similarly.

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Consolidating International Financial Statements (cont.) Equity accounts, on the other hand, are translated into dollars by using the exchange rate that prevailed when the parent’s equity investment was made (the historical rate). Retained earnings are adjusted to reflect each year’s operating profits (or losses).

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Using Financial Ratios: استخدام النسب المالية Interested Parties الأطراف المهتمة او ذات العلاقة Ratio analysis involves methods of calculating and interpreting financial ratios to assess a firm’s financial condition and performance. تحليل النسب المالية يشمل على حساب وتفسير النسب المالية لتقدير وتقييم الوضع المالي للشركة It is of interest to shareholders, creditors, and the firm’s own management. هي محل اهتمام المساهمين والدائنون وإدارة الشركة الخاصة.

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Using Financial Ratios: Types of Ratio Comparisons أنواع مقارنات النسب Trend or time-series analysis تحليل الاتجاه أوالسلاسل الزمنية – Used to evaluate a firm’s performance over time. يستخدم لتقييم أداء الشركة المالي خلال الوقت

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Using Financial Ratios: Types of Ratio Comparisons (cont.) Trend or time-series analysis Cross-sectional analysis – Used to compare different firms at the same point in time يستخدم لمقارنة عدد من الشركات في فترة زمنية معينة

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Using Financial Ratios: Types of Ratio Comparisons (cont.) Trend or time-series analysis Cross-sectional analysis التحليل المقطعي – Industry comparative analysis تحليل مقارنة الصناعة One specific type of cross sectional analysis. Used to compare one firm’s financial performance to the industry’s average performance نوع من التحليل المقطعي يستخدم لمقارنة أداء الشركة المالي مع معدل أداء الصناعة.

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Using Financial Ratios: Types of Ratio Comparisons (cont.) Trend or time-series analysis Cross-sectional analysis – Benchmarking القياس A type of cross sectional analysis in which the firm’s ratio values are compared to those of a key competitor or group of competitors that it wishes to emulate نوع من التحليل المقطعي والتي تتم فيه مقارنة قيم النسب المالية للشركة مع منافس كبير أو مع مجموعة من المنافسين والتي ترغب في الوصول لها.

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Using Financial Ratios: Types of Ratio Comparisons (cont.) Trend or time-series analysis Cross-sectional analysis Combined Analysis التحليل المركب – Combined analysis simply uses a combination of both time series analysis and cross-sectional analysis التحليل المركب يستخدم ببساطة مزيج لكل من تحليل السلاسل الزمنية والتحليل المقطعي.

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Using Financial Ratios: Types of Ratio Comparisons (cont.)

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Using Financial Ratios: Types of Ratio Comparisons (cont.)

2-25 Using Financial Ratios: Cautions for Doing Ratio Analysis المحددات لاستخدام التحليل المالي للنسب Ratios must be considered together; a single ratio by itself means relatively little. النسب المالية يجب أن تأخذ بعين الاعتبار معا، حيث أن نتيجة نسبة مالية واحدة تكون ضعيفة الدلالة. Financial statements that are being compared should be dated at the same point in time.القوائم المالية التي تقارن يجب أن تقارن مع قوائم مالية معدة في نفس الفترة الزمنية Use audited financial statements when possible. يجب استخدام قوائم مالية مدققة إن أمكن The financial data being compared should have been developed in the same way. البيانات المالية التي تقارن يجب تعد بنفس الطريقة والشكل Be wary of inflation distortions. يجب أخذ بعين الاعتبار التشوهات في القوائم المالية بسبب التضخم

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Ratio Analysis Example مثال على التحليل المالي We will illustrate the use of financial ratios for analyzing financial statements using the Bartlett Company Income Statements and Balance Sheets presented earlier in Tables 2.1 and 2.2. نحن سوف نشير إلى تحليل النسب المالية باستخدام القوائم المالية لشركة بارتلت (قائمة الدخل والمركز المالي) المعروضة سابقاً في جدول 2.1 و جدول 2.2

Copyright © 2006 Pearson Addison-Wesley. All rights reserved The Four Key Financial Statements

Copyright © 2006 Pearson Addison-Wesley. All rights reserved The Four Key Financial Statements (cont.)

Copyright © 2006 Pearson Addison-Wesley. All rights reserved. 2-29

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Current ratio = total current assets total current liabilities Current ratio = $1,223,000 = 1.97 $620,000 Ratio Analysis Liquidity Ratios نسب السيولة – Current Ratio نسبة التداول (المثلى 2:1)

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Quick ratio = Total Current Assets - Inventory Total Current Liabilities Quick ratio = $1,223,000 - $289,000= 1.51 $620,000 Ratio Analysis (cont.) Liquidity Ratios – Current Ratio – Quick Ratio نسبة السيولة (المثلي 1:1)

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Inventory Turnover = Cost of Goods Sold Inventory Inventory Turnover = $2,088,000 = 7.2 $289,000 Ratio Analysis (cont.) Liquidity Ratios Activity Ratios نسب النشاط – Inventory Turnover معدل دوران المخزون

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Average Age of Inventory = 365 Inventory Turnover Inventory Turnover = 365 = 50.7 days 7.2 Ratio Analysis (cont.) Liquidity Ratios Activity Ratios – Average Age of Inventory متوسط فترة التخزين

Copyright © 2006 Pearson Addison-Wesley. All rights reserved ACP = Accounts Receivable (Net Sales/365) ACP = $503,000 = 59.7 days ($3,074,000/365) Ratio Analysis (cont.) Liquidity Ratios Activity Ratios – Average Collection Period متوسط فترة التحصيل (فترة الائتمان الممنوحة للمدينين) – ارتفاع هذه النسبة يعتبر مؤشر جيد)

2-35 APP = Accounts Payable (Annual Purchases/365) APP = $382,000 = 95.4 days (0.70 x $2,088,000)/365 Ratio Analysis (cont.) Liquidity Ratios Activity Ratios – Average Payment Period متوسط فترة السداد (فترة السداد الممنوحة للمنشأة من قبل الدائنين) Given

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Total Asset Turnover= Net Sales Total Assets Total Asset Turnover= $3,074,000 = 0.85 $3,597,000 Ratio Analysis (cont.) Liquidity Ratios Activity Ratios – Total Asset Turnover معدل دوران إجمالي الأصول (ارتفاع هذه النسبة مؤشر جيد)

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Insert Table 2.6 here Ratio Analysis (cont.)

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Debt Ratio = Total Liabilities/Total Assets Debt Ratio = $1,643,000/$3,597,000 = 45.7% Ratio Analysis (cont.) Liquidity Ratios Activity Ratios Financial Leverage Ratios نسب الرافعة المالية – Debt Ratio نسب الدين

2-39 Times Interest Earned = EBIT/Interest Times Interest Earned = $418,000/$93,000 = 4.5 Ratio Analysis (cont.) Liquidity Ratios Activity Ratios Leverage Ratios نسب الرافعة – Times Interest Earned Ratio نسبة عدد مرات تغطية الفوائد

2-40 FPCR = EBIT + Lease Payments Interest + Lease Pymts + {(Princ Pymts + PSD) x [1/(1-t)]} FPCR = $418,000 + $35,000= 1.9 $93,000 + $35,000 + {($71,000 + $10,000) x [1/(1-0.29)]} Ratio Analysis (cont.) Liquidity Ratios Activity Ratios Leverage Ratios – Fixed-Payment coverage Ratio (FPCR) نسبة تغطية المدفوعات الثابتة Given

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Ratio Analysis (cont.) Liquidity Ratios نسب السيولة Activity Ratiosنسب النشاط Leverage Ratiosنسب الرافع المالي\الدين Profitability Ratios نسب الربحية – Common-Size Income Statements

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Ratio Analysis (cont.)

Copyright © 2006 Pearson Addison-Wesley. All rights reserved GPM = Gross Profit/Net Sales GPM = $986,000/$3,074,000 = 32.1% Ratio Analysis (cont.) Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios – Gross Profit Margin

Copyright © 2006 Pearson Addison-Wesley. All rights reserved OPM = EBIT/Net Sales OPM = $418,000/$3,074,000 = 13.6% Ratio Analysis (cont.) Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios – Operating Profit Margin (OPM)

Copyright © 2006 Pearson Addison-Wesley. All rights reserved NPM = Earnings Available to Common Stockholders Sales NPM = $221,000/$3,074,000 = 7.2% Ratio Analysis (cont.) Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios – Net Profit Margin (NPM)

Copyright © 2006 Pearson Addison-Wesley. All rights reserved EPS= Earnings Available to Common Stockholders Number of Shares Outstanding EPS = $221,000 / 76,262 = $2.90 Ratio Analysis (cont.) Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios – Earnings Per Share (EPS)

Copyright © 2006 Pearson Addison-Wesley. All rights reserved ROA= Earnings Available to Common Stockholders Total Assets ROA= $221,000 / $3,597,000 = 6.1% Ratio Analysis (cont.) Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios – Return on Total Assets (ROA)

Copyright © 2006 Pearson Addison-Wesley. All rights reserved ROE= $221,000 / $1,754,000 = 12.6% ROE= Earnings Available to Common Stockholders Common Equity Ratio Analysis (cont.) Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios – Return on Equity (ROE)

Copyright © 2006 Pearson Addison-Wesley. All rights reserved P/E= Market Price Per Share of Common Stock Earnings Per Share P/E = $32.25/$2.90 = 11.1 Ratio Analysis (cont.) Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios Market Ratios – Price Earnings (P/E) Ratio

Copyright © 2006 Pearson Addison-Wesley. All rights reserved BV per Share = Common Stock Equity Number of Shares of Common Stock BV per Share = $1,754,000 / 76,262 = $23.00 Ratio Analysis (cont.) Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios Market Ratios – Market/Book (M/B) Ratio

Copyright © 2006 Pearson Addison-Wesley. All rights reserved M/B Ratio = Market Price per Share of Common Stock Book Value per Share of Common Stock M/B Ratio = $32.25 / $23.00 = 1.40 Ratio Analysis (cont.) Liquidity Ratios Activity Ratios Leverage Ratios Profitability Ratios Market Ratios – Market/Book (M/B) Ratio

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Summarizing All Ratios

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Summarizing All Ratios (cont.)

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Summarizing All Ratios (cont.)

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Summarizing All Ratios (cont.)

Copyright © 2006 Pearson Addison-Wesley. All rights reserved DuPont System of Analysis The DuPont system of analysis is used to dissect the firm’s financial statements and to assess its financial condition. It merges the income statement and balance sheet into two summary measures of profitability: ROA and ROE as shown in the equation below and in Figure 2.2 on the following slide.

Copyright © 2006 Pearson Addison-Wesley. All rights reserved DuPont System of Analysis (cont.)

Copyright © 2006 Pearson Addison-Wesley. All rights reserved Modified DuPont Formula The Modified DuPont Formula relates the firm’s ROA to its ROE using the financial leverage multiplier (FLM), which is the ratio of total assets to common stock equity:

Copyright © 2006 Pearson Addison-Wesley. All rights reserved ROE = 6.1% X 2.06 = 12.6% Modified DuPont Formula (cont.) Use of the FLM to convert ROA into ROE reflects the impact of financial leverage on the owner’s return. Substituting the values for Bartlett Company’s ROA of 6.1 percent calculated earlier, and Bartlett’s FLM of 2.06 ($3,597,000 total assets ÷ $1,754,000 common stock equity) into the Modified DuPont formula yields: