MGMT_130_Lecture_3

MGMT_130_Lecture_3 - MGMT130Lecture3...

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MGMT 130 Lecture 3 Financial Statement Analysis Long Term Financial Planning
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Why Use Financial Statements? (1) Very useful for valuation of securities (2) Help the manager with decision-making Today we focus on the second. “Clearly, one important goal of the  accountant is to report financial information to  the user in a form useful for decision making.  Ironically, the information frequently does not  come to the user in such a form. In other  words, financial statements don’t come with a  user guide.”
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Use Ratios In order to compare financial statements across  companies, they need to be standardized. We  do this by using ratios. Home Depot: Net Sales of $16,361 and Cost of  Sales at $10,800 in 2009, down from $17,784  and $11,790 in 2008. Lowes: Net Sales of $11,375 and Cost of Sales  at $7,485 in 2009, down from $11,728 and  $7,743 in 2008. HD costs are 66.0% in 2009 and 66.3% in 2008. Lowes costs are 65.8% in 2009 and 66.0% in  2008.
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Key Questions How is the ratio computed? What is it intended to measure, and why  are we interested? What is the unit of measurement? What might a high or low value mean?  How could such values be misleading? How could this measure be improved?
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Categories of Ratios Short-term solvency, or liquidity,  ratios Long-term solvency, or leverage, ratios Asset management, or turnover, ratios Market value ratios Profitability ratios
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Short-term Solvency, Liquidity Current Ratio = Current Assets/Current  Liabilities How is it computed? What is it intended to measure? (short term  liquidity) What is the unit of measurement? (multiples of  liabilities) What might high or low value mean? How could  it be misleading? (large cash inflow?) How could this measure be improved?  (inventories?)
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Short-term Solvency, Liquidity Quick Ratio = (Current Assets –  Inventory)/Current Liabilities Inventory is least liquid of current assets,  might have very low value. Rising  inventories might not be a good sign. Five questions…
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Long Term Solvency, Leverage Total Debt Ratio = (Total Assets – Total  Equity)/ (Total Assets) Debt to Equity Ratio = Total Debt/Total  Equity Cash Coverage Ratio = (EBIT +  Depreciation) /Interest
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Asset Management Ratios Inventory Turnover = Cost of Goods 
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MGMT_130_Lecture_3 - MGMT130Lecture3...

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