Chapter 6 Financial statement Analysis 6-1
6-1 Chapter 6 Financial Statement Analysis
Financial Statement Analysis a Financial statements n A Possible Framework for Analysis n Ratio Analysis n Trend Analysis a Common- Size and Index analysis 6-2
6-2 Financial Statement Analysis Financial Statements A Possible Framework for Analysis Ratio Analysis Trend Analysis Common-Size and Index Analysis
Examples of External Uses of Statement Analysis n Trade Creditors - Focus on the liquidity of the firm n Bondholders- Focus on the long term cash flow of the firm n Shareholders- Focus on the profitability and long-term health of the firm 6-3
6-3 Examples of External Uses of Statement Analysis Trade Creditors -- Focus on the liquidity of the firm. Bondholders -- Focus on the long-term cash flow of the firm. Shareholders -- Focus on the profitability and long-term health of the firm
Examples of Internal Uses of Statement Analysis n Plan Focus on assessing the current financial position and evaluating potential firm opportunities. Control- Focus on return on investment for various assets and asset efficiency n Understand-- Focus on understanding how suppliers of funds analyze the firm 6-4
6-4 Examples of Internal Uses of Statement Analysis Plan -- Focus on assessing the current financial position and evaluating potential firm opportunities. Control -- Focus on return on investment for various assets and asset efficiency. Understand -- Focus on understanding how suppliers of funds analyze the firm
Primary Types of Financial statements Balance sheet n A summary of a firm's financial position on a given date that shows total assets total liabilities owners'equity Income statement n A summary of a firms revenues and expenses over a specified period, ending with net income or loss for the period 6-5
6-5 Primary Types of Financial Statements Income Statement A summary of a firm’s revenues and expenses over a specified period, ending with net income or loss for the period. Balance Sheet A summary of a firm’s financial position on a given date that shows total assets = total liabilities + owners’ equity
Basket wonders Balance Sheet (Asset Side) Basket Wonders Balance Sheet (thousands) Dec 31, 19X3a Cash and C,E 90 a. How the firm stands on Acct rec.c 394 a specific date Inventories 696 b What BW owned Prepaid Exp 5 c. Amounts owed by Accum Tax Prepay 10 customers Current Assets$1, 195 d. Future expense items Fixed Assets(@Cost)' 1030 already paid. Less: AcC. Depr. 9 329)e. Cash/likely convertible Net Fix Assets s 701 to cash within 1 year Investment. LT 50f. Orginal amount paid. Other Assets. LT 223 g. AcC deductions for 6-6 Total Assets b $2,169 wear and tear
6-6 Basket Wonders’ Balance Sheet (Asset Side) a. How the firm stands on a specific date. b. What BW owned. c. Amounts owed by customers. d. Future expense items already paid. e. Cash/likely convertible to cash within 1 year. f. Original amount paid. g. Acc. deductions for wear and tear. Cash and C.E. $ 90 Acct. Rec.c 394 Inventories 696 Prepaid Exp d 5 Accum Tax Prepay 10 Current Assetse $1,195 Fixed Assets (@Cost)f 1030 Less: Acc. Depr. g (329) Net Fix. Assets $ 701 Investment, LT 50 Other Assets, LT 223 Total Assets b $2,169 Basket Wonders Balance Sheet (thousands) Dec. 31, 19X3a
Basket wonders Balance Sheet (Liability Side Basket Wonders Balance Sheet ( thousands) Dec 31, 19X3 Notes Payable s 290 a Note, Assets Acct Payable c 94 Liabilities Equity. Accrued taxes d 16 b. What BW owed and Other Accrued Liab. d-100 ownership position Current Liab. e 500 c. Owed to suppliers for Long-Term Debt f 530 goods and services. Shareholders'Equity d. Unpaid wages, Com. Stock($1 par) 200 salaries,etc Add pd in capital 9 729 e. Debts payable≤1year Retained Earnings h 210f. Debts payable >1 year. Total Equity $1,139 g. Original investment. 6-7 Total Liab/Equitya, b $2,169 I h. Earnings reinvested
6-7 Basket Wonders’ Balance Sheet (Liability Side) a. Note, Assets = Liabilities + Equity. b. What BW owed and ownership position. c. Owed to suppliers for goods and services. d. Unpaid wages, salaries, etc. e. Debts payable 1 year. g. Original investment. h. Earnings reinvested. Notes Payable $ 290 Acct. Payablec 94 Accrued Taxes d 16 Other Accrued Liab. d 100 Current Liab. e $ 500 Long-Term Debt f 530 Shareholders’ Equity Com. Stock ($1 par) g 200 Add Pd in Capital g 729 Retained Earnings h 210 Total Equity $1,139 Total Liab/Equitya,b $2,169 Basket Wonders Balance Sheet (thousands) Dec. 31, 19X3
Basket wonders Income Statement Basket Wonders Statement of Earnings(in thousands) for Year Ending December 31, 19X3a Net sales s 2, 211 a. Measures profitability Cost of Goods Sold b1,599 over a time period. Gross Profit 612 b. Received, or receivable SG&A Expenses c-402 from customers. EBITd s 210c Sales comm, adv Interest Expense 59 officers salaries, etc EBT f s 151 d Operating income Income Taxes 60 e. Cost of borrowed funds EAT s 91 f. Taxable income Cash Dividends 38 ncrease in RE s- 53 g. Amount earned for 6-8 shareholders
6-8 Basket Wonders’ Income Statement a. Measures profitability over a time period. b. Received, or receivable, from customers. c. Sales comm., adv., officer‘s salaries, etc. d. Operating income. e. Cost of borrowed funds. f. Taxable income. g. Amount earned for shareholders. Net Sales $ 2,211 Cost of Goods Sold b 1,599 Gross Profit $ 612 SG&A Expenses c 402 EBITd $ 210 Interest Expensee 59 EBT f $ 151 Income Taxes 60 EATg $ 91 Cash Dividends 38 Increase in RE $ 53 Basket Wonders Statement of Earnings (in thousands) for Year Ending December 31, 19X3a
Framework for Financial Analysis Trend/Seasonal Component How much funding will be required in the future? 1. Analysis of the funds needs of the firm Is there a seasonal component? Analytical Tools Used Sources and uses statement Statement of Cash Flows Cash Budgets 6-9
6-9 Framework for Financial Analysis Analytical Tools Used Sources and Uses Statement Statement of Cash Flows Cash Budgets 1. Analysis of the funds needs of the firm. Trend / Seasonal Component How much funding will be required in the future? Is there a seasonal component?
Framework for Financial Analysis Health of a firm Analysis or the funds Financial Ratios needs of the firm 2. Analysis of the financial condition and profitability Individually of the firm 2. Over time 3.In combination 4. In comparison 6-10
6-10 Framework for Financial Analysis Health of a Firm Financial Ratios 1. Individually 2. Over time 3. In combination 4. In comparison 1. Analysis of the funds needs of the firm. 2. Analysis of the financial condition and profitability of the firm