1. Ch. 3: Working with Financial Statements
accounting numbers are often just pale reflections of economic reality, but they frequently are the best available information. (p. 50)
Contents
Standardized Financial Statements
Ratio Analysis
The Du Pont Identity
Internal and Sustainable Growth
Using Financial Statement Information

2. Standardized Financial Statements
Common-Size Balance Sheets (p. 51)
Common-Size Income Statements (p. 52)

3. Ratio Analysis Short-Term Solvency (Liquidity) Current Ratio
Quick (Acid-Test) Ratio
Cash Ratio

4. Long-Term Solvency (Leverage)
Total Debt Ratio
Times Interest Earned
Cash Coverage

5. Asset Management (Turnover) Inventory Turnover Receivables Turnover
Days’ Sales in Inventory
Receivables Turnover
Days’ Sales in Receivables
Payables Turnover
Days to Pay
Total Asset Turnover

6. Profitability
Profit Margin
Return on Assets
Return on Equity

7. Market Value
Price-Earnings Ratio
Market-to-Book Ratio

8. The Du Pont Identity ROE = PM * TAT * EM
Profit Margin (PM) is a measure of the firm’s operating efficiency; how well does it control costs?
Total Asset Turnover (TAT) is a measure of the firm’s asset use efficiency; how well does it manage its assets?
Equity Multiplier (EM) is a measure of the firm’s financial leverage.

9. Internal & Sustainable Growth
Dividend Payout Ratio
Retention (Plowback) Ratio
Internal Growth Rate
Sustainable Growth Rate

10. Using Financial Statement Information
Why Evaluate Financial Statements?
internal uses
external uses
Benchmarking
time-trend analysis
peer group analysis
Problems with Financial Statement Analysis

11. Recommended Practice Self-Test Problems 3.1 - 3.4, pp. 73-5
Questions 1-4, 7, pp. 75-6
Problems on pp : 3, 5, 7, 9, 11, 13, 19, 21, 29, 37, 39 (answers are on p. 547)