Chapter 3 Statements and Ratios © 2012 Pearson Prentice Hall. All rights reserved. 1-1.
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Transcript of Chapter 3 Statements and Ratios © 2012 Pearson Prentice Hall. All rights reserved. 1-1.
Chapter 3 Statements and Ratios
© 2012 Pearson Prentice Hall. All rights reserved. 1-1
© 2012 Pearson Prentice Hall. All rights reserved. 3-2
The Stockholders’ Report
• Generally accepted accounting principles (GAAP) are the practice and procedure guidelines used to prepare and maintain financial records and reports;
• The Sarbanes-Oxley Act of 2002, passed to eliminate the many disclosure and conflict of interest problems of corporations
• More Countries Adopt International Financial Reporting Standards
– International Financial Reporting Standards (IFRS) are established by the International Accounting Standards Board (IASB).
© 2012 Pearson Prentice Hall. All rights reserved. 3-3
Focus on Ethics
Take Earnings Reports at Face Value
– Near the end of each quarter, many companies unveil their quarterly performance.
– Firms that beat analyst estimates often see their share prices jump, while those that miss estimates by even a small amount, tend to suffer price declines.
– The practice of manipulating earnings in order to mislead investors is known as earnings management.
• Why might financial managers be tempted to manage earnings?
• Is it unethical for managers to manage earnings if they disclose their activities to investors?
© 2012 Pearson Prentice Hall. All rights reserved. 3-4
The Four Key Financial Statements: The Income Statement
• The income statement provides a financial summary of a company’s operating results during a specified period.
• Although they are prepared quarterly for reporting purposes, they are generally computed monthly by management and quarterly for tax purposes.
© 2012 Pearson Prentice Hall. All rights reserved. 3-5
Table 3.1 Bartlett Company Income Statements ($000)
Concentrate on control issue•Gross profit – control expenses of production•Operating profit – control of the expenses of “running” the company•Net income – remaining profits after all expenses paid
© 2012 Pearson Prentice Hall. All rights reserved. 3-6
The Four Key Financial Statements: The Balance Sheet
• The balance sheet presents a summary of a firm’s financial position at a given point in time.
• The statement balances the firm’s assets (what it owns) against its financing, which can be either debt (what it owes) or equity (what was provided by owners).
© 2012 Pearson Prentice Hall. All rights reserved. 3-7
Table 3.2a Bartlett Company Balance Sheets ($000)
Represents the assets that management has purchased and uses to achieve it’s mission and goals.
© 2012 Pearson Prentice Hall. All rights reserved. 3-8
Table 3.2b Bartlett Company Balance Sheets ($000)
Represents how management gets the $$ to purchase the assets of the firm.
© 2012 Pearson Prentice Hall. All rights reserved. 3-9
The Four Key Financial Statements: Statement of Retained Earnings
The statement of retained earnings reconciles the net income earned during a given year, and any cash dividends paid, with the change in retained earnings between the start and the end of that year.
© 2012 Pearson Prentice Hall. All rights reserved. 3-10
The Four Key Financial Statements: Statement of Cash Flows
• The statement of cash flows provides a summary of the firm’s operating, investment, and financing cash flows and reconciles them with changes in its cash and marketable securities during the period.
• This statement not only provides insight into a company’s investment, financing and operating activities, but also ties together the income statement and previous and current balance sheets.
© 2012 Pearson Prentice Hall. All rights reserved. 3-11
Table 3.4 Bartlett Company Statement of
Cash Flows ($000) for the Year Ended
December 31, 2012
The cash flow statement illustrates the primary decisions that managers make.•Managers make decisions on how to run the business (operations)•Managers decide what kinds of assets to buy (investment)•Managers decide where to get the $$ to run the business (financing)
Financial Ratio Analysis
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The Balance-Sheet Model of the Firm
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Current Assets
Fixed Assets
1 Tangible
2 Intangible
Total Book Value of Assets:
Shareholders’ Equity
Current Liabilities
Long-Term Debt
Total Firm Value to Investors:
All the “stuff” we have purchased for the firm
Where did the money come from to buy the “stuff”
Using Financial Ratios: Cautions for Doing Ratio Analysis
Ratios must be considered together; a single ratio by itself means relatively little.
Financial statements that are being compared should be dated at the same point in time.
Use audited financial statements when possible.
The financial data being compared should have been developed in the same way.
Be wary of inflation distortions.
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Molson Coors (TAP)
2002 2003 2004 2005 2006
$3,776 $4,000 $4,305 $5,506 $5,844
$2,415 $2,587 $2,741 $3,307 $3,481
$1,361 $1,413 $1,564 $2,199 $2,363
$1,063 $1,106 $1,216 $1,777 $1,782
$298 $307 $348 $422 $581
-$70 -$81 -$72 -$131 -$143
$28 $27 $32 $4 $34
$256 $253 $308 $295 $472
-$94 -$79 -$95 -$50 -$82
$162 $174 $213 $245 $390
Extraordinary $122 -$137 -$77 $21 -$273
Net Income $40 $311 $290 $224 $663
Fully Diluted EPS $4.420 $4.770 $5.190 $1.690 $4.170
Dividends per Share $0.820 $0.820 $0.820 $1.280 $1.280
$56.850 $52.900 $72.220 $65.230 $75.880
Year
Net Sales
Cost of Goods Sold
EBT (Earn Before Taxes)
Taxes (neg)
NI from Recurring Op
Gross Profit
Other Op Expenses
EBIT (Op Income)
Interest Exp (neg)
Stock Price (end of yr)
Interest Income
15 of 34Business Finance/ Income Statement (data)
Molson Coors (TAP)
2002 2003 2004 2005 2006
$59 $19 $123 $39 $182
$704 $656 $832 $828 $828
$184 $209 $234 $314 $319
$106 $194 $79 $287 $129
$1,053 $1,078 $1,268 $1,468 $1,458
$1,380 $1,450 $1,445 $2,305 $2,421
$1,256 $1,348 $1,471 $7,294 $7,363
$608 $568 $473 $732 $361
$4,297 $4,444 $4,657 $11,799 $11,603
$334 354 326 371 419
$813 $779 $850 $1,865 $1,381
$1,147 $1,133 $1,176 $2,236 $1,800
$2,168 $2,044 $1,843 $4,154 $3,939
$3,315 $3,177 $3,019 $6,390 $5,739
$1,086 $1,231 $1,398 $1,422 $1,673
-$104 $36 $240 $3,987 $4,191
$4,297 $4,444 $4,657 $11,799 $11,603
36.566 36.596 37.909 80.036 86.656
Year
Account Receivable
Cash & Mkt Sec.
Inventory
Misc CA
Net Fixed Assets
Total Current Assets
Intangibles
Total Assets
Other Non-Current Assets
Retained Earnings
Total Liabilities and Equity
Outstanding Shares
Common Stock
Accounts Payable
Other CL
Total Current Liabilities
Notes Payable (LT)
Total Debt
LT Debt
16 of 34Business Finance / Balance Sheet (data)
Molson Coors (TAP)
2002 2003 2004 2005 2006
$244 $528 $499 $422 $833
$230 $242 $267 $414 $441
-$1,570 -$214 -$67 -$312 -$294
$1,291 -$357 -$335 -$188 -$401
-$35 -$43 $97 -$78 $138Net Change in Cash
Net Cash from Financing
Net Cash from Investing
Net Cash from Op Activities
Derpreciation
Year
17 of 34Business Finance / Cash Flow Statement (data)
18 of 34
Malt Beverage Industry
Business Finance / Industry Ratios
2002 2003 2004 2005 2006
1.60 1.20 1.50 1.30 1.40
0.70 0.60 0.90 0.60 0.70
23.00 17.00 21.00 23.00 22.00
32.00 41.00 39.00 42.00 40.00
28.00 29.00 28.00 29.00 31.00
2.20 3.00 1.60 2.40 2.10
1.50 1.40 1.10 1.50 1.40
200.00% 230.00% 180.00% 140.00% 140.00%
56.40% 63.00% 57.40% 57.50% 66.50%
160.00% 210.00% 180.00% 130.00% 160.00%
3.300 1.900 2.200 2.900 3.800
2.29 2.70 2.35 2.35 2.99
38.40% 36.70% 40.30% 37.30% 36.90%
6.20% 4.20% 5.10% 5.60% 7.10%
5.90% 4.80% 3.10% 5.90% 7.40%
9.30% 5.88% 5.61% 8.40% 9.94%
22.40% 18.10% 8.60% 19.50% 24.20%
4.10% 2.60% 3.10% 3.80% 6.00%EBT / Sales
Current Ratio (CR)
Quick Ratio (QR)
Asset Management
Days Sales Outstand DSO
Days Carry Inv DCI
Days Payable Outstand DPO
Liquidity
Year
Fixed Asset Turnover FAT
Total Asset Turnover TAT
Leverage Ratios
LTD / NW (DE)
TD / TA (DR)
FA / NW
Times Int Earned (TIE)
Profitability Ratios
Financial Leverage (FLM)
Gross Profit (GPM)
Operating Profit (OPM)
EBT / TA ("ROA")
BEP
EBT / Tang. NW ("ROE")
Liquidity ratios
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CLCA
CR =CL
INVCAQR
-
Measures the ability of the firm to pay current obligations
Use both if inventory is a large portion of the company’s current assets
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Liquidity Ratios
0.400
0.600
0.800
1.000
1.200
1.400
1.600
1.800
2002 2003 2004 2005 2006
TAP Current ratio
Industry Current Ratio
TAP Quick Ratio
Industry Quick Ratio
Business Finance / Financial Ratios
Asset mgt ratios (Activity)
21 of 34
365/CGSP/A
DPO =
365/CGSINV
DCI =INVCGS
IT =
365/salesR/A
ACPDSO ==
R/Asales
turnover R/A =
Average number of days inventory on the shelf
Average number of days for customers to pay for their accounts
Average number of days it takes us to pay our accounts
22 of 34
20.000
25.000
30.000
35.000
40.000
45.000
50.000
2002 2003 2004 2005 2006
TAP Days Carry Inventory
Industry Days Carry Inventory
Business Finance / Financial Ratios
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0.000
10.000
20.000
30.000
40.000
50.000
60.000
70.000
80.000
2002 2003 2004 2005 2006
TAP Days Sales Outstanding
Industry Days Sales Outstanding
Business Finance / Financial Ratios
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0.000
20.000
40.000
60.000
2002 2003 2004 2005 2006
TAP Days Payable Outstanding
Industry Days Payable Outstanding
Business Finance / Financial Ratios
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TAsales
TAT =
assets fixednetsales
FAT =
Asset mgt ratios (Activity, Efficiency)
Measures management’s efficient use of assets
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0.000
0.500
1.000
1.500
2.000
2.500
3.000
3.500
1 2 3 4 5
TAP Fixed Asset Turnover
Industry Fixed Asset Turnover
TAP Total Asset Turnover
Industry Total Asset Trunover
Business Finance / Financial Ratios
Leverage ratios
Degree of indebtedness (how much)– cannot say whether good or bad– Mgt chooses a level of debt– NW = common equity = TA - TL
Ability to pay int
Financial leverage - use of other peoples money to make a higher return
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leverage ratios
28 of 34
TATD
DR = NWLTD
DE =
INTEBIT
TIE =
29 of 34
40.000%
45.000%
50.000%
55.000%
60.000%
65.000%
70.000%
75.000%
80.000%
85.000%
90.000%
2002 2003 2004 2005 2006
TAP Debt Ratio
Industry Debt Ratio
Business Finance / Financial Ratios
30 of 34
0.000
1.000
2.000
3.000
4.000
5.000
6.000
2002 2003 2004 2005 2006
TAP Times Interest Earned
Industry Times Interest Earned Ratio
Business Finance / Financial Ratios
Profitability ratios
31 of 34
salesOP recurring fromNI
NPM =
salesGP
GPM =
salesEBIT
OPM =
SalesEBT
Sales/EBT =
32 of 34
0.000%
5.000%
10.000%
15.000%
20.000%
25.000%
30.000%
35.000%
40.000%
45.000%
2002 2003 2004 2005 2006
TAP Gross Profit Margin
Industry GPM
TAP Operating Profit MArgin
Industry OPM
Business Finance / Financial Ratios
33 of 34
0.000%
2.000%
4.000%
6.000%
8.000%
10.000%
12.000%
2002 2003 2004 2005 2006
TAP Operating Profit MArgin
Industry OPM
TAP EBT / Sales
Industry EBT / Sales
Business Finance / Financial Ratios
Profitability ratios
34 of 34
shares #common to available NI
EPS =
TAavailable NI
ROA =
TAEBIT
BEP =
35 of 34
0.000%
5.000%
10.000%
15.000%
20.000%
25.000%
2002 2003 2004 2005 2006
TAP Basic Earning Power
Industry Basic Earning Power
Business Finance / Financial Ratios
Market Based Ratios
36 of 34
shares #equity pfdTLTA
shares #CE
BPS
BPSprice mkt
book to mkt
EPSprice Mkt
PE
Graph EPS & PE for the presentation
37 of 34
0.000
5.000
10.000
15.000
20.000
25.000
30.000
35.000
40.000
45.000
2002 2003 2004 2005 2006
TAP PE Ratio
TAP EPS
Business Finance / Financial Ratios
ROE (Dupont analysis)
Owner profitability can be measured by
– profitability
– asset management
– Leverage
• equity multiplier of financial leverage multiplier
• (leverage number)
38 of 34
CE
TA*
TA
Sales*
SAles
NIFLM*TAT*NPMROE
2002 2003 2004 2005 2006
6.780% 6.325% 7.154% 5.358% 8.077%
0.879 1.111 1.082 2.143 1.985
5.958% 7.027% 7.739% 11.481% 16.036%
4.376 3.507 2.843 2.181 1.979
26.069% 24.647% 22.004% 25.045% 31.730%
2002 2003 2004 2005 2006
5.900% 4.800% 3.100% 5.900% 7.400%
1.500 1.400 1.100 1.500 1.400
8.850% 6.720% 3.410% 8.850% 10.360%
2.294 2.703 2.347 2.353 2.985
20.298% 18.162% 8.005% 20.824% 30.925%
EBT / Sales
TAT
ROA
FLM
Approx EOE
Company
Company
EBT / Sales
TAT
ROA
FLM
Approx EOE
39 of 34Business Finance / DuPont Analysis
Personal Financial Statements
1.Personal Net Worth
2.Cash Mgt and Budgets
40 of 34