FINANCIAL MANAGEMENT

TUTORIAL 2 – FINANCIAL STATEMENTS ANALYSIS

Part 1: Additional exercises

Question 1: Identify whether the following statements are True or False. Correct the false statement.

1. The income statement measures the flow of funds into (i.e. revenue) and out of (i.e. expenses) the
firm over a certain time period. It is always based on accounting data.
2. The balance sheet is a financial statement measuring the flow of funds into and out of various
accounts over time while the income statement measures the progress of the firm at a point in
time.
3. An increase in an asset account is a source of cash, whereas an increase in a liability account is a
use of cash.
4. Depreciation, as shown on the income statement, is regarded as a use of cash because it is an
expense.
5. When a firm pays off a loan using cash, the source of funds is the decrease in the asset account,
cash, while the use of funds involves a decrease in a liability account, debt.
6. Taxes and reporting considerations, as well as credit sales and non-cash costs, are reasons why
operating cash flows can differ from accounting profits.
7. The balance sheet presents a summary of the firm’s revenues and expenses over an accounting
period.
8. On the balance sheet, total assets must equal total liabilities plus stockholders equity.
9. One of the biggest noncash items on the income statement is depreciation which needs to be
subtracted from net income to determine cash flows for the firm.

Question 2. Complete the below Balance Sheet

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Question 3. Complete the income statement

Question 4. Given the answers in question 1 and 2 above, calculate Earnings per share, Dividend per
share, and Book value per share for the company.

Part 2: Required exercises and questions

Question 1. Name five categories of financial ratios.

Question 2. Write the Dupont equation and discuss its components.

Exercise 1: Bartley Barstools has an equity multiplier of 2.4, and its assets are financed with some

combination of long-term debt and common equity. What is its debt-to-assets ratio?
debt - to - assets ratio -> e.m = A/E= 2.4 -> a/e = 2.4/1 ->

Exercise 2. Doublewide Dealers has an ROA of 10%, a 2% profit margin, and an ROE of 15%. What is its

total assets turnover? What is its equity multiplier?

TOA = PM * TATO -> TATO = ROA/PM -> 10/2= 5
-> ROE = ROA * EM -> EM = ROE/ROA -> 15/10= 1.4

Exercise 3. A firm has a profit margin of 2% and an equity multiplier of 2.0. Its sales are $100 million, and it

has total assets of $50 million. What is its ROE?

ROE= PM * TATO* EM -> 2% * 100/50 *2 = 8%

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 Exercise 4. Midwest Packaging’s ROE last year was only 3%; but its management has developed a new

operating plan that calls for a debt-to-assets ratio of 60%, which will result in annual interest charges of

$300,000. The firm has no plans to use preferred stock. Management projects an EBIT of $1,000,000 on

sales of $10,000,000, and it expects to have a total assets turnover ratio of 2.0. Under these conditions,

the tax rate will be 34%. If the changes are made, what will be the company’s return on equity?
Last years ROE= OM * TATO * EM = 2
ROE = 3% = NI/Sales * 2 * 2.5
This year: D/A = 0.6 -> A/E= 10/4= 2.5 NI = (EBIT - I)*(1-Tc)
I= 300,000=0.3m
EBIT= 1m
TATO= 2x
Tc= 34%
ROE= ?

e.g: Q= 1m
P= $10
C= $6
D= $0.2
-> Gross profit = P - C -> (contribution margin * quantity - D -I)*(1-T) -> earning before tax
EBT

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