1. Financial Statements: Basic Concepts and Comprehensive Analysis15
Financial Statements: Basic Concepts and Comprehensive Analysis

2. Financial Statements Balance Sheet
Assets - economic resources expected to benefit future activities
Liabilities - economic obligations to non owners
Shareholders' s equity - excess of assets over liabilities or owners' interest in the firm
A = L + O/E
Income Statement
Measures the operating performance of the organization by matching revenues and expenses
Revenues - amounts earned by selling goods or services
Expenses - amounts incurred to earn revenues
Liabilities
Assets
Shareholders’
Equity
Revenues
Expenses
Net income

3. Dividends and Retained Earnings
Sum of all net incomes earned less all dividends paid to shareholders since the firm began operations
Dividends
Distribution of net income to shareholders
Not an expense
Balance Sheet Dec 31 Year 1
Balance Sheet Dec 31 Year 2
Liabilities
Liabilities
Assets
Assets
Shareholders’
Equity
Shareholders’
Equity
Beginning Net Dividends Ending
Retained + income - Declared = Retained
Earnings for year 2 in year 2 Earnings

4. Ratio Analysis
Ratio analysis is the basis of most financial statement analysis
Compare ratios in three ways
Time-series analysis compare with firm's own ratios in past
Cross-sectional analysis compare with other companies' ratios
Benchmarking compare with common rules of thumb

5. Four Categories of Ratios
1. Liquidity Ratios
Whether company is able to meet its short-term financial obligations
2. Profitability Ratios
Examination of levels of profits earned
3. Stability Ratios
Measure of long-term financial strength
4. Growth Ratios
Show areas where company has increased or decreased in size

6. Liquidity Ratios Current Ratio = Current assets / Current liabilities
Quick Ratio = Cash + Accounts receivable / Current liabilities
Working capital = Current assets - Current liabilities
Age of Receivables = Accounts receivable / (Sales / No. of days)
Age of Inventory = Inventory / (Cost of goods sold / No. of days)
Age of Payables = Accounts payable / (Purchases / No. of days)
Inventory Turnover = Cost of goods sold / Inventory

7. Profitability Ratios
Return on Assets (ROA) = Net income / Total assets
Net Income Margin = Net income / Sales
Asset Turnover = Sales / Assets
Return on Shareholders’ Equity = Net income /
Shareholders’ equity

8. Stability Ratios Equity to Assets = Equity / Assets
Debt to Assets = Debt / Assets
Equity to Assets = Equity / Assets
Times Interest Earned = (Net income before taxes Interest) / Interest

9. Growth Ratios Sales = (Current year’s sales - Last
year’s sales) / Last year’s sales
Profit = (Current year’s profit - Last
year’s profit) / Last year’s profit
Assets = (Current year’s assets - Last
year’s assets) / Last year’s assets
Equity = (Current year’s equity - Last
year’s equity) / Last year’s equity

10. Cash Flow Analysis Statement of Cash Flows
Where cash came from and what cash was used for
Operating Activities
Net income $240,000
+ Non-cash expenses 130,000
- Non-cash revenues (20,000)
+/- Working capital changes (100,000)
Cash from Operations $250,000
Investing Activities
+ Purchase of plant and equipment (200,000)
Cash used for Investing Activities (200,000)
Financing Activities
+ Sale of stock $200,000
- Retirement of long-term debt (150,000)
- Payment of dividends (40,000)
Cash from Financing Activities 10,000
Net increase in cash for the year $ 60,000