.

Chapter 6Chapter 6 Financial StatementFinancial Statement

AnalysisAnalysis © Pearson Education Limited 2004 Fundamentals of
Financial Management, 12/e Created by: Gregory A. Kuhlemeyer, Ph.D.
Carroll College, Waukesha, WI
. 2. 2 After studying Chapter 6,After studying Chapter 6, you should be
able to:you should be able to: Understand the purpose of basic financial
statements and their contents. Explain why financial statement analysis
is important to the firm and to outside suppliers of capital. Define,
calculate, and categorize (according to liquidity, financial leverage,
coverage, activity, and profitability) the major financial ratios and
understand what they can tell us about the firm. Define, calculate, and
discuss a firm’s operating cycle and cash cycle. Use ratios to analyze a
firm's health and then recommend reasonable alternative courses of
action to improve the health of the firm. Analyze a firm’s return on
investment (i.e., “earning power”) and return on equity using a DuPont
approach. Understand the limitations of financial ratio analysis. Use
trend analysis, common-size analysis, and index analysis to gain
additional insights into a firm's performance.
. 3. 3 FinancialFinancial Statement AnalysisStatement Analysis
Financial Statements A Possible Framework for Analysis Balance Sheet
Ratios Income Statement and Income Statement/Balance Sheet Ratios
Trend Analysis Common-Size and Index Analysis
. 4. 4 Examples of External UsesExamples of External Uses of Statement
Analysisof Statement Analysis Trade CreditorsTrade Creditors -- Focus
on the liquidity of the firm. BondholdersBondholders -- Focus on the
long-term cash flow of the firm. ShareholdersShareholders -- Focus on
the profitability and long-term health of the firm.
. 5. 5 Examples of Internal UsesExamples of Internal Uses of Statement
Analysisof Statement Analysis PlanPlan -- Focus on assessing the
current financial position and evaluating potential firm opportunities.
ControlControl -- Focus on return on investment for various assets and
asset efficiency. UnderstandUnderstand -- Focus on understanding how
suppliers of funds analyze the firm.
. 6. 6 Primary Types ofPrimary Types of Financial StatementsFinancial
Statements Income StatementIncome Statement A summary of a
firm’s revenues and expenses over a specified period, ending with net
income or loss for the period. Balance SheetBalance Sheet A summary
 of a firm’s financial position on a given date that shows total assets =
total liabilities + owners’ equity.
. 7. 7 Basket Wonders’ BalanceBasket Wonders’ Balance Sheet (Asset
Side)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.cc 394 Inventories 696 Prepaid Expdd 5 Accum
Tax Prepay 10 Current AssetsCurrent Assetsee $1,195$1,195 Fixed
Assets (@Cost)ff 1030 Less: Acc. Depr. gg (329) Net Fix. AssetsNet Fix.
Assets $ 701$ 701 Investment, LT 50 Other Assets, LT 223 b Basket
Wonders Balance Sheet (thousands) Dec. 31, 2007Basket Wonders
Balance Sheet (thousands) Dec. 31, 2007a
. 8. 8 Basket Wonders’ BalanceBasket Wonders’ Balance Sheet (Liability
Side)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. f.
Debts payable > 1 year. g. Original investment. h. Earnings reinvested.
Notes Payable $ 290 Acct. Payablecc 94 Accrued Taxesdd 16 Other
Accrued Liab.dd 100 Current Liab.Current Liab.ee $$ 500500
Long-Term Debtff 530 Shareholders’ Equity Com. Stock ($1 par)gg
200 Add Pd in Capitalgg 729 Retained Earningshh 210 TotalTotal
EquityEquity $$1,1391,139 a,b Basket Wonders Balance Sheet
(thousands) Dec. 31, 2007Basket Wonders Balance Sheet (thousands)
Dec. 31, 2007
. 9. 9 Basket Wonders’Basket Wonders’ Income StatementIncome
Statement a. Measures profitability over a time period. b. Received, or
receivable, from customers. c. Sales comm., adv., officers’ 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
Soldbb 1,599 Gross Profit $ 612 SG&A Expensescc 402 EBITd $ 210
Interest Expensee 59 EBTff $ 151 Income Taxes 60 EATg $ 91 Cash
Dividends 38 Increase in REIncrease in RE $ 53$ 53 Basket Wonders
Statement of Earnings (in thousands)Basket Wonders Statement of
Earnings (in thousands) for Year Ending December 31, 2007for Year
Ending December 31, 2007a
. 10. 10 Framework forFramework for Financial AnalysisFinancial
Analysis Analytical Tools UsedAnalytical Tools Used Sources and Uses
Statement Statement of Cash Flows Cash Budgets 1. Analysis of the
funds1. Analysis of the funds needs of the firm.needs of the firm. Trend
/ Seasonal ComponentTrend / Seasonal Component How much funding
will be required in the future? Is there a seasonal component?
. 11. 11 Framework forFramework for Financial AnalysisFinancial
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 financial2. Analysis of the financial condition
and profitabilitycondition and profitability of the firm.of the firm.
. 12. 12 Framework forFramework for Financial AnalysisFinancial
Analysis ExamplesExamples:: Volatility in sales Volatility in costs
Proximity to break-even point 1. Analysis of the funds needs of the firm.
2. Analysis of the financial condition and profitability of the firm. 3.
Analysis of the business3. Analysis of the business risk of the firm.risk of
the firm. Business riskBusiness risk relates to the risk inherent in the
operations of the firm.