Chapter 04 w Learning Obj

# Chapter 04 w Learning Obj - Chapter 4 Analysis of Financial...

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4-1 Chapter 4 - Analysis of Financial Statements   Learning Objectives After reading this chapter, students should be able to: Explain why ratio analysis is usually the first step in the analysis of a  company’s financial statements. List the five groups of ratios, specify which ratios belong in each group,  and explain what information each group gives us about the firm’s  financial position. State what trend analysis is, and why it is important. Describe how the basic Du Pont equation is used, and how it may be  modified to form the extended Du Pont equation, which includes the  effect of financial leverage. Explain “benchmarking” and its purpose. List several limitations of ratio analysis. Identify some of the problems with ROE that can arise when firms use it  as a sole measure of performance. Identify some of the qualitative factors that must be considered when  evaluating a company’s financial performance.

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4-2 CHAPTER 4 Analysis of Financial  Statements Ratio Analysis Du Pont system Effects of improving ratios Limitations of ratio analysis Qualitative factors
4-3 Balance Sheet: Assets    Cash A/R Inventories Total CA Gross FA Less: Dep. Net FA Total Assets       2005 7,282   632,160 1,287,360 1,926,802 1,202,950     263,160     939,790 2,866,592       2006E 85,632  878,000 1,716,480 2,680,112 1,197,160     380,120     817,040 3,497,152

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4-4 Balance sheet:  Liabilities and Equity Accts payable Notes payable Accruals Total CL Long-term debt Common stock Retained earnings Total Equity Total L & E       2005 524,160   636,808     489,600 1,650,568 723,432 460,000      32,592     492,592 2,866,592       2006E 436,800   300,000     408,000 1,144,800 400,000 1,721,176     231,176 1,952,352 3,497,152
4-5 Income statement Sales COGS Other expenses EBITDA Depr. & Amort. EBIT Interest Exp. EBT Taxes Net income       2005 6,034,000 5,528,000      519,988     (13,988)       116,960   (130,948)      136,012   (266,960)   (106,784)   (160,176)     2006E 7,035,600   5,875,992     550,000 609,608    116,960 492,648      70,008 422,640     169,056    253,584

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4-6 Other data No. of shares EPS DPS Stock price Lease pmts 2006E 250,000 \$1.014 \$0.220 \$12.17 \$40,000 2005 100,000 -\$1.602 \$0.110 \$2.25 \$40,000
4-7 Why are ratios useful? Ratios standardize numbers and  facilitate comparisons. Ratios are used to highlight  weaknesses and strengths. Ratio comparisons should be made  through time and with competitors Trend analysis Peer (or Industry) analysis

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4-8 What are the five major categories of  ratios, and what questions do they  answer?
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