ch4-lect

# ch4-lect - Chapter 4 Financial Statement Analysis Tools...

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Chapter 4 Financial Statement Analysis Tools Introduction You’ve studied ratio analysis several times in your financial studies. This chapter demonstrates how to set up ratios in Excel. The process is straight-forward. It involves typing the ratio formulas into Excel and pulling the data for the calculations for the related financial statements. Review of Ratios This week's discussion focuses on financial indicators or ratios that we use to gain further insight into company performance. Financial ratios are calculated by comparing two account balances on the financial statements of a company. The result is a performance measure that when compared to industry standards helps investors better gauge a company's performance in specific areas. The general categories of comparison include liquidity, operating (also called activity or utilization), and profitability, solvency, and market ratios. Our discussion begins with common size financial statements. When I look at Company X's balance sheet, I might want to know how their fixed assets compare as a percent of total assets to Company Y. To facilitate this comparison, elements of the balance sheet are presented as a percentage of total assets. In a common size balance sheet, elements of the statement are presented as a percentage of total assets. In a common size income statement, elements of the statement are presented as percentages of net sales or revenues. This presentation device allows for comparison of the relative amount of assets, liabilities, equities and income categories across time and among different sized firms, without calculation by the reader. For example, Ford may report cash of \$4.836 billion and SkyTel cash of \$20 million. Cash represented 2 % and 2.7 % of these companies' assets, respectively. Thus, although SkyTel has much less absolute cash than Ford, its relative cash position is actually higher than Ford's. Common size financial statements enables users of financial statements to evaluate the relative efficiency and the relative claims on economic resources of firms regardless of the amount of the absolute value of the entity's economic resources or the changes therein. Now let's look at measures of performance through ratio analysis of individual financial statement accounts. Different finance books divide ratios into different categories, but the following are most common: Liquidity Ratios Liquidity ratios help lenders and other creditors evaluate an entity's ability to pay its bills as they become due. The most commonly used liquidity ratio is the

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## This note was uploaded on 02/14/2011 for the course FINANCE 615 taught by Professor Green during the Fall '09 term at UMBC.

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ch4-lect - Chapter 4 Financial Statement Analysis Tools...

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