Beruflich Dokumente
Kultur Dokumente
INTERPRETATION OF
FINANCIAL STATEMENTS
Prof. Asif Masood
Ahmad
Superior University
Lahore
relationships
625
Examples?
627 628
627 628
Other sources
(1)
Newspapers (e.g., Wall Street Journal )
(2)
Periodicals (e.g. Forbes, Fortune)
(3)
Financial information organizations such as:
Moodys,
Standard & Poors, Dun & Bradstreet, Inc., and
Robert
Morris Associates
(4)
Other business publications
Horizontal Analysis
Vertical Analysis
Common-Size Statements
Trend Percentages
Ratio Analysis
Using
Using comparative
comparative financial
financial
statements
statements to
to calculate
calculate dollar
dollar
or
or percentage
percentage changes
changes in
in aa
financial
financial statement
statement item
item from
from
one
one period
period to
to the
the next
next
For
For aa single
single financial
financial
statement,
statement, each
each item
item
is
is expressed
expressed as
as aa
percentage
percentage of
of aa
significant
significant total,
total,
e.g.,
e.g., all
all income
income
statement
statement items
items are
are
expressed
expressed as
as aa
percentage
percentage of
of sales
sales
Financial
Financial statements
statements that
that show
show
only
only percentages
percentages and
and no
no
absolute
absolute dollar
dollar amounts
amounts
Show
Show changes
changes over
over time
time in
in
given
given financial
financial statement
statement items
items
(can
(can help
help evaluate
evaluate financial
financial
information
information of
of several
several years)
years)
Expression
Expression of
of logical
logical relationships
relationships
between
between items
items in
in aa financial
financial
statement
statement of
of aa single
single period
period
(e.g.,
(e.g., percentage
percentage relationship
relationship
between
between revenue
revenue and
and net
net income)
income)
Current Year
Figure
Base Year
Figure
Current Year
Figure
Base Year
Figure
Dollar Change
Base Year Figure
100%
CLOVER CORPORATION
Comparative Balance Sheets
December 31, 1999 and 1998
1999
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable
Notes payable
Total current liabilities
Long-term liabilities:
Bonds payable, 8%
Total liabilities
Stockholders' equity:
Preferred stock
Common stock
Additional paid-in capital
Total paid-in capital
Retained earnings
Total stockholders' equity
Total liabilities and stockholders' equity
67,000 $
3,000
70,000
1998
Increase (Decrease)
Amount
%
44,000 $
6,000
50,000
23,000
(3,000)
20,000
52.3
(50.0)
40.0
75,000
145,000
80,000
130,000
(5,000)
15,000
(6.3)
11.5
20,000
60,000
10,000
90,000
80,000
170,000
315,000 $
20,000
60,000
10,000
90,000
69,700
159,700
289,700 $
10,300
10,300
25,300
0.0
0.0
0.0
0.0
14.8
6.4
8.7
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31, 1999 and 1998
Increase (Decrease)
1999
1998
Amount
%
Net sales
$ 520,000 $ 480,000 $ 40,000
8.3
Cost of goods sold
360,000
315,000
45,000
14.3
Gross margin
160,000
165,000
(5,000)
(3.0)
Operating expenses
128,600
126,000
2,600
2.1
Net operating income
31,400
39,000
(7,600)
(19.5)
Interest expense
6,400
7,000
(600)
(8.6)
Net income before taxes
25,000
32,000
(7,000)
(21.9)
Less income taxes (30%)
7,500
9,600
(2,100)
(21.9)
Net income
$ 17,500 $ 22,400 $
(4,900)
(21.9)
CLOVER CORPORATION
Comparative Income Statements
For the Years Ended December 31, 1999 and 1998
Increase (Decrease)
1999
1998
Amount
%
Net sales
$ 520,000 $ 480,000 $ 40,000
8.3
Cost of goods sold
360,000
315,000
45,000
14.3
Gross margin
160,000
165,000
(5,000)
(3.0)
Operating expenses
128,600
126,000
2,600
2.1
Net operating income
31,400
39,000
(7,600)
(19.5)
Interest expense
6,400
7,000
(600)
(8.6)
Net income before taxes
25,000
32,000
(7,000)
(21.9)
Less income taxes (30%)
7,500
9,600
(2,100)
(21.9)
Net income
$ 17,500 $ 22,400 $
(4,900)
(21.9)
$1,820 = $171
= 9% rounded
Trend line
for Sales
CAUTION!
Using ratios and percentages without
considering the underlying causes may
lead to incorrect conclusions.
Liquidity Ratios
Liquidity Ratios
Current (working capital) ratio
Acid-test (quick) ratio
Cash flow liquidity ratio
Accounts receivable turnover
Number of days sales in accounts
receivable
Inventory turnover
Total assets turnover
651
Profitability Tests
Return on operating assets
Market Tests
Earnings yield on common stock
Price-earnings ratio
Payout ratio on common stock
Dividend yield on common stock
Dividend yield on preferred stock
Cash flow per share of common stock
NORTON CORPORATION
1999
Cash
$ 30,000
We will
use this
information
to calculate
the liquidity
ratios for
Norton.
Beginning of year
17,000
End of year
20,000
Inventory
Beginning of year
10,000
End of year
12,000
65,000
42,000
Sales on account
494,000
140,000
12/31/99
Current assets
Current liabilities
Working capital
65,000
(42,000)
23,000
#1
Current
Ratio
Current Assets
Current Liabilities
Current
Ratio
$65,000
$42,000
1.55 : 1
#2
Acid-Test
=
Ratio
Quick Assets
Current Liabilities
Quick assets are Cash,
Marketable Securities,
Accounts Receivable (net) and
current Notes Receivable.
#2
Acid-Test
=
Ratio
Quick Assets
Current Liabilities
Norton Corporations quick
assets consist of cash of
$30,000 and accounts
receivable of $20,000.
#2
Acid-Test
=
Ratio
Acid-Test
=
Ratio
Quick Assets
Current Liabilities
$50,000
$42,000
= 1.19 : 1
#3
Accounts
Receivable =
Turnover
Sales on Account
Average Accounts Receivable
Accounts
$494,000
= 26.70 times
Receivable =
($17,000 + $20,000) 2
Turnover
This ratio measures how many
times a company converts its
receivables into cash each year.
#4
Days Sales
in Accounts =
Receivables
Days Sales
in Accounts =
Receivables
365 Days
Accounts Receivable Turnover
365 Days
26.70 Times
= 13.67 days
#4
Days Sales
in Accounts =
Receivables
Days Sales
in Accounts =
Receivables
365 Days
Accounts Receivable Turnover
365 Days
26.70 Times
= 13.67 days
#5
Inventory
Turnover
Inventory
Turnover
$140,000
=
= 12.73 times
($10,000 + $12,000) 2
#5
Inventory
Turnover
Inventory
Turnover
$140,000
=
= 12.73 times
($10,000 + $12,000) 2
Would 5 be a
desirable number of times
for inventory to turnover?
$ 84,000
494,000
7,300
234,390
NORTON CORPORATION
1999
Common shares outstanding
Beginning of year
End of year
Net income
Here is the
rest of the
information
we will
use.
17,000
27,400
$ 53,690
Stockholders' equity
Beginning of year
180,000
End of year
234,390
2
20
7,300
Total assets
Beginning of year
300,000
End of year
346,390
#6
Equity
=
Ratio
Equity
=
Ratio
Stockholders Equity
Total Assets
$234,390
$346,390
= 67.7%
#7
Net Income
to
=
Net Sales
Net Income
Net Sales
Net Income
to
=
Net Sales
$53,690
$494,000
= 10.9%
#7
Net Income
to
=
Net Sales
Net Income
Net Sales
Net Income
to
=
Net Sales
$53,690
$494,000
= 10.9%
#8
Return on
Stockholders =
Equity
Return on
Stockholders =
Equity
Net Income
Average Common
Stockholders Equity
$53,690
($180,000 + $234,390) 2
Important measure of the
income-producing ability
of a company.
= 25.9%
#9
Earnings Available to Common Stockholders
Earnings
=
Weighted-Average Number of Common
per Share
Shares Outstanding
Earnings
$53,690
=
per Share
(17,000 + 27,400) 2
= $2.42
Whats new ?
644
Weighted-average calculation
Earnings available to
EPS of common stock = _______________________
common stockholders
Weighted-average number of
common shares outstanding
Whats new?
645
Weighted-average calculation
Earnings available to
EPS of common stock = _______________________
common stockholders
Weighted-average number of
common shares outstanding
Alternate #1
645
Alternate #2
Alternate #3
#10
Price-Earnings
=
Ratio
Price-Earnings
=
Ratio
$20.00
$ 2.42
= 8.3 : 1
Impact of inflation
The
The current
current ratio
ratio is
is aa measure
measure of
of liquidity
liquidity that
that
is
is
computed
computed by
by dividing
dividing total
total assets
assets by
by total
total
liabilities.
liabilities.
a.
a. True
True
b.
b. False
False
Question
The
The current
current ratio
ratio is
is aa measure
measure of
of
liquidity
liquidity that
that is
is computed
computed by
by dividing
dividing
total
total assets
assets by
by total
total liabilities.
liabilities.
a.
a. True
True
The
current
ratio
is
aa measure
of
The
current
ratio
is
measure
of
b.
False
b. False
liquidity, but is computed by
liquidity, but is computed by
dividing
dividing current
current assets
assets by
by
current
current liabilities
liabilities
Quick
Quick assets
assets are
are defined
defined as
as Cash,
Cash, Marketable
Marketable
Securities
Securities
and
and net
net receivables.
receivables.
a.
a. True
True
b.
b. False
False
Question
Quick
Quick assets
assets are
are defined
defined as
as Cash,
Cash,
Marketable
Marketable Securities
Securities and
and net
net
receivables.
receivables.
a.
a. True
True
b.
b. False
False