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BCOR 2200 Chapter 3

# BCOR 2200 Chapter 3 - Chapter 3 Working with Financial...

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Chapter 3 Working with  Financial  Statements 1

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Chapter Outline 3.1  Standardized Financial  Statements 3.2  Ratio Analysis 3.3  The Du Pont Identity 3.4  Internal and Sustainable  Growth 3.5  Using Financial Statement  Information 2
Key Concepts and Skills Know how to standardize financial  statements for comparison purposes Know how to compute and interpret  important financial ratios Know the determinants of a firm’s  profitability and growth Understand the problems and pitfalls in  financial statement analysis 3

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3.1 Standardized Financial  Statements The basic idea:  Divide everything on the page by the  biggest number on the page Balance Sheet:  The biggest number is Total  Assets (or Liabilities plus Equity) Income Statement:  The biggest number is  Sales 4
Standardized Balance Sheet Table 3.1 5

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Standardized Balance Sheet Table 3.2:  Standardized B-S 6
Standardized Balance Sheet This is Table 3.1 laying over Table 3.2: 7

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Standardized Income Statement This is Table 3.3 laying over Table 3.4: Some other stuff we will need later for the “Ratio Analysis”: EBIT = NI + Int Exp + Tax Exp = 363 + 141 + 187 = \$691 EBITDA = NI + Int Exp + Tax Exp + Dep Exp = 691 + 276 = \$967 8
3.2 Ratio Analysis Instead of values, show as fractions of other values (ratios) Ratio Categories: 1. Short-Term Solvency Firm’s ability to pay current bills  2. Long-Term Solvency  Firm’s ability to meet LT debt obligations 3. Asset Management   aka Turnover Ratios (Efficiency measures) 4. Profitability Ratios 5. Market Value Ratios Some things to think about as we look at ratios: 1. Definition of the Ratio How is it computed?  Is it always the same? (It will be for us) Sometime the ending B-S value is used.  Sometimes the Average  value  2. What is the unit of Measure?  Dollars, years, Dollars of assets… 3. What are HIGH values?  What are LOW values? For the company over time, for the industry, for the sector, for all  companies… 9

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Category 1:  Short-Term Solvency First Some Notation: Current Assets = CA, Current Liabilities = CL Total Assets = TA = A Total Liabilities = TL = L = Total Debt = TD = Debt =D Total Equity = TE = E [3.1]  Current Ratio = CA/CL = 708/540 = 1.31 [3.2]  Quick Ratio = (CA – Inv)/CL = (708 – 442)/540 = 0.53       Inventory is the least liquid current asset [3.3]  Cash Ratio = Cash/CL = 98/540 = 0.18       Cash is the most liquid current asset 10
Clicker Question 11

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Category 2:  Long-Term Solvency Balance Sheet: [3.4]  Total Debt Ratio = Debt to Assets = D/A = 997/3,588 = 0.28            Equity to Assets = E/A = 2,591/3,588 = 0.72 [3.5]  Debt to Equity = D/E = 997/2,591 = 0.38

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BCOR 2200 Chapter 3 - Chapter 3 Working with Financial...

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