Accounting Chapter 13: Analysis of financial statements
price earnings ratio formula
market price per common share/ earnings per share
return on common stockholders equity
measures a company's success in earning more income for its owners
return on total assets formula
net income / average total assets
profit margin formula
net income / net sales
accounts receivable turnover formula
net sales / average accounts receivable
total asset turnover formula
net sales / average total assets
competitors
provide standards for comparisons
total asset turnover
reflects a companies ability to use its assets to generate sales and is an important measure of operating efficiency
acid test ratio
reflects a company short term liquidity
days sales uncollected formula
(accounts receivable/ net sales) x 365
common size percent formula
(analysis amount / base amount) x 100
trend percent formula
(analysis period amount/base period amount) x 100
acid test ratio formula
(cash + short term investments + current receivables) / current liabilities
days sales in inventory formula
(ending inventory/COGS) x 365
times interest earned
(income before interest expense and income taxes) / interest expense
return on common stockholders equity formula
(net income - preferred dividends) / average common stockholders equity
three tools of financial statement analysis are:
1. horizontal analysis: comparison of a company financial condition and performance across time 2. vertical analysis: comparison of a company financial condition and performance to a base amount 3. ratio analysis: measurement of key relations between financial statement items
4 standards for comparison
1. intracompany 2. competitor 3. industry 4. guidelines (rules of thumb)
four building blocks of financial statement analysis
1. liquidity and efficiency: ability to meet short-term obligations and to efficiently generate revenues 2. solvency: ability to generate future revenues and meet long-term obligations 3. profitability: ability to provide financial rewards to attract and retain financing 4. market prospects: ability to generate positive market expectations
three assets that must be recognized in analysis of current ratio
1. type of business 2. composition of current assets 3. turnover rate of current assets components
percent change formula
[(analysis period amount - base period amount) - base period amount] x 100
profitability
a company's ability to earn an adequate return on invested capital
trend analysis
a form of horizontal analysis that can reveal patterns in data across successive periods
working capital
amount of current assets minus current liabilities
dollar change formula
analysis period amount - base period amount
dividend yield formula
annual cash dividends per share / market value per share
financial statement analysis
applies analytical tools to financial statements and related data for making business decisions
profit margin
company's ability to earn net income from sales
inventory turnover formula
cost of goods sold / average inventory
equity ratio
expresses total equity as a percent of total assets
debt ratio
expresses total liabilities as a percent of total assets
accounts receivable turnover
how frequently a company coverts its receivables into cash by computing
general-purpose financial statements
include the 1. income statement 2. balance sheet 3. statement of stockholders equity 4. statement of cash flows 5. notes to these statements
industry
industry statistics provide standards of comparison
common size financial statements
show changes in the relative importance of each financial statement item
comparative financial statements
show financial amounts in side by side columns on a single statement
guidelines (rule of thumb)
standards of comparisons can develop from experience
financial reporting
the communication of financial information useful for making investment, credit and other business decisions
intracompany
the company current performance is compared to its prior performance and its relations between financial items
what is the purpose of financial statement analysis?
to provide strategic information to improve company efficiency and effectiveness
debt to equity ratio
total liabilities / total equity
dividend yield
used to compare the dividend paying performance of different companies