FINANCIAL ACCOUNTING A USER PERSPECTIVE

1
FINANCIAL ACCOUNTINGA USER PERSPECTIVE

• Hoskin Fizzell Davidson
• Second Canadian Edition

2
Financial Statement Analysis

• Chapter Twelve

3
Time-Series Analysis

• Examine information from different time period in
  the life of the company
• Look for patterns in the data over time
• Assumes that there is predictability in the time
  series

4
Cross-sectional Analysis

• Compares data from one company to another for the
  same time period
• Usually companies in the same industry are
  compared

5
Common Size Data

• Ability to compare the relationships between line
  items of differing dollar amounts (raw financial
  data)
• Statement of earnings
• All line items are expressed as percentages of
  net revenues

6
Common Size Statement of Earnings
7
Ratios

• Explain relationships among data in the financial
  statements
• General categories
• Performance
• Short-term liquidity
• Long-term liquidity

8
Performance Ratios

• Return on investment (ROI)
• measures investment performance
• Return on equity (ROE)
• shareholders perspective
• Return on assets (ROA)
• measures investment in assets

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Return on Assets
Net income before interest
ROA

Average total assets
Net income Interest expense x (1-Tax rate)

Average total assets
10
Return on Equity
Net income - Preferred dividends
ROE

Average common shareholders equity
11
Leverage

• Financial leverage
• Some of the funds obtained to invest in assets
  came from debtholders rather than from
  shareholders
• High leverage
• larger proportion of debt to equity

12
Performance Ratios

• Turnover ratios
• Accounts receivable
• Inventory
• Accounts payable

13
Accounts Receivable Turnover
Sales on account
Accounts receivable turnover

Average accounts
receivable
365
Days to collect

Accounts receivable turnover
14
Inventory Turnover
Cost of goods sold
Inventory turnover

Average inventory
Days inventory held
365

Inventory turnover
15
Accounts Payable Turnover
Credit purchases
Accounts payable turnover

Average accounts payable
365
Days to pay

Accounts payable turnover
16
Short-Term Liquidity Ratios

• Current ratio
• Quick ratio

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Current Ratio
Current Assets

Current Ratio
Current Liabilities
4,115,116
Current Ratio


1.79
2,294,778
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Quick Ratio
Current Assets - Inventory - Prepaid
Expenses

Quick Ratio
Current Liabilities
4,115,116 - 2,050,703 - 433,785
Quick Ratio


.71
2,294,778
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Long-Term Liquidity Ratios

• Debt-equity ratio
• Times interest ratio

20
Debt-Equity Ratio
Total liabilities

Debt/Equity
Total liabilities shareholders equity
21
Times Interest Earned
Times interest earned
Income before interest and taxes

Interest
22
Earnings Per Share
Basic earnings per share
Net income - Preferred dividends

Weighted average number of common shares
outstanding
23
Price/Earnings Ratio
Price/ earnings
Stock market price per share

Earnings per share