Kế toán, kiểm toán - Chapter 17: Analysis of financial statements

ANALYSIS OF FINANCIAL STATEMENTSChapter 17Application of analytical toolsInvolves transforming dataReduces uncertaintyBASICS OF ANALYSISFinancial statement analysis helps users make better decisions.Internal UsersManagersOfficersInternal AuditorsExternal UsersShareholdersLendersCustomersC 1BUILDING BLOCKS OF ANALYSISC 1Liquidity and efficiencySolvencyMarket prospectsProfitabilityINFORMATION FOR ANALYSISC 1Income Statement (Statement of Comprehensive Income)Balance Sheet (Statement of Financial Position)Statement of Changes in EquityStatement of Cash FlowsNotes to the Financial StatementsIntracompanyCompetitorsIndustryGuidelinesSTANDARDS FOR COMPARISONC 1When we interpret our analysis, it is essential to compare the results we obtained to other standards or benchmarks. Horizontal AnalysisComparing a company’s financial condition and performance across time.TOOLS OF ANALYSISVertical AnalysisComparing a company’s financial condition and performance to a base amount.Ratio AnalysisMeasurement of key relations between financial statement items.C 2HORIZONTAL ANALYSISP 1COMPARATIVE STATEMENTSCalculate Change in Dollar AmountDollarChangeAnalysis Period AmountBase PeriodAmount=–When measuring the amount of the change in dollar amounts, compare the analysis period balance to the base period balance. The analysis period is usually the current year while the base period is usually the prior year. P 1COMPARATIVE STATEMENTSCalculate Change as a PercentPercentChangeDollar Change Base Period Amount100=×P 1When calculating the change as a percentage, divide the amount of the dollar change by the base period amount, and then multiply by 100 to convert to a percentage. $1,550,861 – $835,546 = $715,315P 1($715,315 ÷ $835,546) × 100 = 85.6%HORIZONTAL ANALYSISHORIZONTAL ANALYSIS($3,888,038 ÷ $11,065,186) × 100 = 35.1%$14,953,224 – $11,065,186 = $3,888,038P 1TREND ANALYSISTrend analysis is used to reveal patterns in data covering successive periods.TrendPercent Analysis Period Amount Base Period Amount100=×P 1TREND ANALYSISResearch in MotionIncome Statement InformationUsing 2006 as the base year we will get the following trend information:Examples of 2006-2008 Calculations for Revenues:2006 is base year. Set to 100%2007: $3,037,103 ÷ $2,065,845 × 100 = 147.0%2008: $6,009,395 ÷ $2,065,845 × 100 = 290.9%P 1TREND ANALYSISWe can use the trend percentages to construct a graph so we can see the trend over time.P 1VERTICAL ANALYSISCommon-Size StatementsCommon-size PercentAnalysis AmountBase Amount100=×Financial Statement Base AmountBalance Sheet Total AssetsIncome Statement RevenuesP 2($1,550,861 ÷ $10,204,409) × 100 = 15.2%($835,546 ÷ $8,101,372) × 100 = 10.3%COMMON-SIZE BALANCE SHEETP 2COMMON-SIZE INCOME STATEMENTP 2($8,368,958 ÷ $14,953,224) × 100 = 56.0%COMMON-SIZE GRAPHICSP 2RATIO ANALYSISP 3Liquidity and efficiencySolvencyMarket prospectsProfitabilityCurrent RatioAcid-test RatioAccounts Receivable TurnoverInventory TurnoverDays’ Sales UncollectedDays’ Sales in InventoryTotal Asset TurnoverLIQUIDITY AND EFFICIENCYP 3Days’ Purchases in Accounts PayableWORKING CAPITALWorking capital represents current assets financed from long-term capital sources that do not require near-term repayment.  Current assets– Current liabilities= Working capital  More working capital suggests a strong liquidity position and an ability to meet current obligations.P 3This ratio measures the short-term debt-paying ability of the company. A higher current ratio suggests a strong liquidity position.CURRENT RATIOCurrent Ratio =Current AssetsCurrent LiabilitiesP 3This ratio is like the current ratio but excludes current assets such as inventories and prepaid expenses that may be difficult to quickly convert into cash. ACID-TEST RATIOAcid-test ratio = Cash + Short-term investments + Current receivablesCurrent LiabilitiesReferred to as Quick AssetsP 3This ratio measures how many times a company converts its receivables into cash each year.ACCOUNTS RECEIVABLE TURNOVERAccounts receivable = turnoverNet salesAverage accounts receivable, netAverage accounts receivable = (Beginning acct. rec. + Ending acct. rec.)2P 3This ratio measures the number of times merchandise is sold and replaced during the year.INVENTORY TURNOVERInventory turnover = Cost of goods soldAverage inventoryAverage inventory = (Beginning inventory + Ending inventory)2P 3Provides insight into how frequently a company collects its accounts receivable.DAYS’ SALES UNCOLLECTED Day's sales = uncollectedAccounts receivable, net× 365Net salesP 3DAYS’ SALES IN INVENTORYDay's sales in = InventoryEnding inventory× 365Cost of goods soldThis ratio is a useful measure in evaluating inventory liquidity. If a product is demanded by customers, this formula estimates how long it takes to sell the inventory.P3DAYS’ PURCHASES IN ACCOUNTS PAYABLE Accounts = PayableAccounts payable× 365Cost of goods soldThis ratio is a useful measure in evaluating how long the business takes to pay its credit suppliers.P3CASH CONVERSION CYCLEThe sum of the days’ sales uncollected and the days’ sales in inventory subtracting the days’ purchases in accounts payable. It represents the number of days a firm’s cash remains tied up within the operations of the business.The lower the cash conversion cycle, the more healthy a company generally is.P 3TOTAL ASSET TURNOVERTotal asset turnover = Net salesAverage total assetsAverage assets = (Beginning assets + Ending assets)2This ratio reflects a company’s ability to use its assets to generate sales. It is an important indication of operating efficiency.P 3DebtRatioEquityRatioPledged Assets to Secured LiabilitiesTimes Interest EarnedSOLVENCYP 3DEBT AND EQUITY RATIOS Amount RatioTotal liabilities $ 8,000,000 66.7% [Debt ratio]Total equity 4,000,000  33.3% [Equity ratio]Total liabilities and equity $ 12,000,000  100.0%      $8,000,000 ÷ $12,000,000 = 66.7%The debt ratio expresses total liabilities as a percent of total assets. The equity ratio provides complementary information by expressing total equity as a percent of total assets.P 3DEBT-TO-EQUITY RATIODebt-to-equity ratio = Total liabilities Total equity This ratio measures what portion of a company’s assets are contributed by creditors. A larger debt-to-equity ratio implies less opportunity to expand through use of debt financing.P 3TIMES INTEREST EARNEDTimes interest earned = Income before interest and taxes Interest expense This is the most common measure of the ability of a company’s operations to provide protection to long-term creditors. Net income+Interest expense+Income taxes=Income before interest and taxes  P 3Profit MarginReturn on Total AssetsReturn on Ordinary Shareholders’ EquityPROFITABILITYP 3PROFIT MARGINProfit margin = Net income Net sales This ratio describes a company’s ability to earn net income from each sales dollar.P 3Return on total asset = Net income Average total assets RETURN ON TOTAL ASSETSReturn on total assets measures how well assets have been employed by the company’s management.P 3RETURN ON ORDINARY SHAREHOLDERS' EQUITYReturn on ordinary shareholders' equity = Net income - Preference dividends Average ordinary shareholders' equity This measure indicates how well the company employed the shareholders’ equity to earn net income.P 3Price-Earnings RatioDividend YieldMARKET PROSPECTSP 3PRICE-EARNINGS RATIOPrice-earnings ratio = Market price per ordinary share Earnings per share This measure is often used by investors as a general guideline in gauging share values. Generally, the higher the price-earnings ratio, the more opportunity a company has for growth.P 3DIVIDEND YIELDDividend yield = Annual cash dividends per share Market price per share This ratio identifies the return, in terms of cash dividends, on the current market price per share of the company’s ordinary shares.P 3ANALYSIS REPORTINGA1Executive SummaryAnalysis OverviewEvidential MatterAssumptionsKey FactorsInferencesThe purpose of financial statement analyses is to reduce uncertainty in business decisions through a rigorous and sound evaluation. A financial statement analysis report directly addresses the building blocks of analysis and documents the reasoning. END OF CHAPTER 17