Financial Accounting Mod 6

Gross profit Margin

= %revenues - COGS = (revenue - COGS)/revenue = gross profit /sales - COGS = cost of sales

profit margin

= (net income / (Cost of sales Gross profit)) - ability of company to make a profit relative to revenue generated during the period if profit margin = 14% --> for every $100 made, $14 end up in net income

leverage

= Average Total Assets/ Average Equity Avg equity = common stock + RE + AOCI If a leverage is 1.37: every dollar of equity outstanding,it has 0.37 funding from liabilities

calculate accounts payable turnover

= COGS / AVG AP\ =C17/AVERAGE(B7:C7) = Cost of Sales / Average Accounts Payable = 106,606 / 21,771 = 4.90

efficiency

= asset turnover = sales/assets

Days purchases outstanding

= average AP / (COGS/ 365) = 365 / AP Turnover - inversely related to AP turnover

average collection period

= average number of days to collect payment = avg AR / Credit sales per day = avg AR/ (revenue/365) = 365 / AR turnover

Debt to Equity Ratio

= avg total labilitets / avg total equity = AVERAE (SUM(liabilities)/SUM(total equities) comparing two years: =AVERAGE(SUM(B7:B11),SUM(C7:C11))/AVERAGE(SUM(B12:B14),SUM(C12:C14))

current assets

= cash/equiv, marketable securities, AR, inventory

Cash conversion cycle

= days inventory + avg collection period - days purchase outstanding measures how long it takes from time it has to pay for inventory until it collects cash from customers growing business has positive cash conversion cycle and will need more and more cash to fund operations

leverage

= equity multiplier = assets/ equity

Financial Leverage

= equity multiplier - measures impact of all non-equity financing or debt on ROE if the formula doesn't include debt at all: debt is implied in the numerator (total assets) → since as liabilities increase, equity multiplier will be greater than one

calculate profit margin:

= net income/ revenue = net income/ (cost of sales + gross profit)

excel calculation for profit margin:

= net income/ revenue if revenue not shown: Revenue = Cost of sales + Gross Profit so net income / (Cost of sales +GP)

asset turnover if revenue is $152,633 avg assets = 82,925

= revenue / avg assets = 1.84

Asset Turnover

= sales / avg assets = indicates the efficiency with which assets are used to generate revenue - if AT = 2.01 -- generates$2 on each $1 offsets using spreadsheet: =revenue/avg assets = B17/average(B14, Sum B2:B9)

interest coverage ratio

= times interest earned - way to gauge how capable business is of making interest payments on debt use EBIT = net income + interest expense + tax expense = number of times a company can cover its interest expense using EBIT

Fran's Furniture Store has an Inventory Turnover of 8.0, an Accounts Receivable Turnover of 10.5, and an Accounts Payable Turnover of 12.1. What is the length of their Cash Conversion Cycle?

=(365/8) + (365/10.5) - (365/12.1) = 50.2

to calculate leverage

=AVERAGE(TOTAL ASSETS)/AVERAGE(SUM(2012 common stock+retained earnings + AOCI + other equity); 2013 common stock+retained earnings+AOCI)

if company A has higher Days inventory than company B

A has lower Inventory Turnover than B

current liabiliteis

AP, accrued expenses, other

What is ROE if net income is $25,000 sales is $55,000 and Assets is $115,000 and no debt

ROE = (net income/Sales) x (Sales / Assets) x (Assets/Equity) = 21.7%

common size financial statements

divide each number in balance sheet by total assets and each number in income by sales -- converts into ratios that help us see trends and easily compare different types of companies

high inventory turnover low PPE

electronic consumer products - sales made online

dupont framework

expands the ROE formula to consist of profitability, efficiency, and leverage Allows us to see where favorable or unfavorable returns are originating

Accounts Payable Turnover

how long it takes company to pay vendors = COGS / AVG AP smaller AP turnover means takes longer to pay suppliers

To decrease Asset turnover

increase in inventory ending balance → this will increase average assets (denominator) -- decreasing ratio

Accounts Receivable Turnover

indicates a business efficiency in collecting receivables from customers = revenue / avg Accounts Receivable (sales = revenue for calculations) For year 2013: take revenue from 2013, and average AR form 2012 and 2013 to find accounts receivable turnover = number of times per year a company is collecting its outstanding accounts receivable

inventory turnover

indicator of operating efficiency -= COGS/ avg inventory = how efficiently a business is managing inventory levels - higher turnover means more efficient inventory management to calculate: COGS/ avg inventory = C15/ AVERAGE(B4:C4:)

high volume retailer

low profit margin, high asset turnover

if current ratio is 2.66

means for every $1 in current liabilities, $2.66 in liquid assets to pay those liabilities

higher AR turnover =

more efficient cash collections

quick ratio

only uses highly liquid current assets = (current assets - inventory) / current liabilities shows ability to meet current obligations even if inventory can't be sold immediately

profitability

profit margin = net income /sales = net income/ revenue

policy differences

ratios allow you to compare companies because eliminates impact of size differences policy differences include: revenue recognition (based on judgment), capitalizing expenditures (whether assets should be expensed or capitalized), depreciation standards - impact how we should consider performing financial statement analysis

to calc average assets

take beginning amount and add liabilities and equities

to calculate average assets

take the ending amount of assets for 2014, $286,064, add the ending amount of assets for 2015, $317,000, and divide by two. Average assets = $301,532

efficiency ratios

tells us how well business is using its assets to produce sales

if all assets financed by equity

the multiplier = 1 as liabilities increase, multiplier increases from 1 demonstrating leverage impact of debt

ratios from balance sheet and income statement

use average of beginning and ending ratios

return on equity

(ROE) return that a business generated during a period on equity invested by the owners = net income / total owners equity - Consists of profitability, operating efficiency, and financial leverage - ROE = profitability x efficiency x leverage = (Net income/sales) * (sales/assets) * (Assets/Equity) - measure of financing performance and where the returns are being generated 13.96% x 2.01 x 1.37 = 38.4% ROE same number as when we divide Net Income by Equity But Dupont lets us see more detail about what is driving ROE

EBIAT

Earnings Before Interest after Taxes = measure of how much income business has generated while ignoring effect of financing and capital structure or proportion of debt - interest expense is added back and income tax expense is calculated and subtracted based on earnings before interest

what type of company would have: High inventory 12% High plant & equipment -- indicates many stores Low receivables = receives sales in cash or credit card High inventory turnover --

Grocery retail chain retailers defined by high inventory level

At the end of the third quarter, a department store is showing lower cash flows and lower sales on its financial statements compared to the average of the previous four quarters. It also shows an increase in inventory compared to the second quarter. Which of the following options is MOST likely to be the cause?

Seasonality

Current ratio

ability to pay short term obligations = current assets/ current liabilities - more liquid - life <1, business has troubles meeting obligations in short term The higher the current ratio the better the position the businesses in → but if too high, may not be managing its working capital efficiently -- could take on more debt to grow business***

company with: no inventory turnover high PPE

airline

Sheetz, a paper manufacturer, has total revenue of $280,910 and total expenses of $243,873 at the end of 2015. Their total assets and liabilities at the end of 2015 are $317,000 and $193,451, respectively. Total assets and liabilities at the end of 2014 are $286,064 and $140,203, respectively. What is the asset turnover observed in 2015?

asset turnover = sales/ average assets = ending 2014 assets + ending assets 2015/ 2 Revenue / Average Assets = 280,910 / 301,532 = 0.93

calculate days purchases outstanding

average AP / (COGS/ 365) = 365 / AP Turnover dividing Average Accounts Payable by the average daily Cost of Sales, which is Cost of Sales divided by 365. Average Accounts Payable / Average Daily Cost of Sales = 21,771 / 292 = 74.54 Days Payable Outstanding: =AVERAGE(B7:C7)/(C17/365)

Days inventory

average days inventory is held before being sold = average inventory / (COGS/365) = 365 / inventory turnover To calculate: divide average inventory by average daily cost of Sales (Cost of Sales/365) → =AVERAGE(B4:C4)/(C15/365) Higher ratio means lower inventory turnover Days inventory is inversely related to Inventory Turnover -- higher days inventory means less efficient because lower turnover rate

increasing ratio in any area of profitability, efficiency, or leverage will increase overall ROE

but if accomplished by higher leverage, greater riskiness of business - higher ROE > lower

Gross profit % trend can be increasing while profit margin trend is decreasing:

can have high profits and low gross profit margin -- means high COGS