1. Financial Statement Analysis Acct 592 July 8, 2003

2. Nike Case Continued…

3. Statement of Cash Flows Grid Direction of Chg. In Acct. During Year IncreaseDecrease Type of Account Asset -+ Liability +- ► Sign (+ or -) indicated in grid is the adjustment to net income for the year in the operating section on the SCFs

4. Chapter 3 Introduction to Profitability and Risk Analysis

5. Using ROA and its components Return on Assets ROA = Profit Margin πM = Asset Turnover ATO =

6. MultiStep Income Statement Net Sales - COGS Gross Profit - Operating Expenses (SG&A) Operating Income +/- Other Revenues and Expenses Income before Taxes - Provision for Taxes Net Income (Income from Cont. Operations)

7. MultiStep IS – Cont. ….. - Provision for taxes Income from Continuing Operations +/- Discontinued operations (net of tax) +/- Extraordinary items (net of tax) +/- Changes in acct. principles (net of tax) Net Income

8. Liquidity Accounts receivable turnover Inventory turnover Accounts payable turnover Current ratio Quick ratio

9. Solvency Long-term Debt Ratio Debt to Equity Ratio Liabilities to Assets Ratio Interest Coverage Ratio (accrual and cash flow) Operating Cash Flows to Liabilities

10. Profitability & the B/S ROA → ROC ROPS ROCE Note that this is not an equality but rather an allocation to each source of capital

11. Now, decompose ROCE Common Capital ROCE = ROA x Earnings x Structure Leverage Leverage

12. EPS, Appendix 3.1 Basic vs. Diluted (Complex) EPS