Handout_04_(APSCW_-_F2009)

Handout_04_(APSCW_-_F2009) - FINANCIALACCOUNTING...

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BUSI W3013 Handout 04 | Page 1 F INANCIAL A CCOUNTING BUSI W3013 | F ALL 2009 H ANDOUT 04 PROFESSOR ANDREW SCHMIDT 1.0 Reformulating Financial Statements …………………………………………………………… 1 2.0 FSA Overview …………………………………………………………… 3 3.0 Profitability Ratios …………………………………………………………… 4 4.0 Growth Ratios …………………………………………………………… 10 5.0 Short Term Liquity Risk Ratios …………………………………………………………… 10 6.0 Lonmg Term Solvency Risk Ratios …………………………………………………………… 12 7.0 Practice Exercise …………………………………………………………… 13 H ANDOUT O BJECTIVES : R EVIEW O F F INANCIAL S TATEMENT A NALYSIS A comprehensive discussion of financial statement analysis (FSA) requires a full course. This handout contains a short review, which is intended to: (1) improve our understanding of the financial statements, and (2) introduce ratios that we will later use as we discuss the implications of different accounting choices. In addition, you should be able to: 1) Understand the difference between operating and nonoperating assets, liabilities, income, and expense and how to use this distinction to reformulate financial statements. 2) Understand why return on equity (ROE) is the summary measure of firm profitability. 3) Understand the accounting decomposition of ROE and how to use the decomposition to evaluate firm performance. 4) Understand the types of ratios used for to analyze factors other than firm profitability: growth prospects, short-term liquidity risk, and long-term solvency risk. 1.0. R EFORMULATING F INANCIAL S TATEMENTS Before we begin to perform our financial statement analysis, we need to reformulate the financial statements to help us distinguish between operating and nonoperating assets and liabilities. The reformulation effectively aligns the financial statements with the activities (operating, investing, and financing) of the business.
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BUSI W3013 Handout 04 | Page 2 Simplified Operating/Nonoperating Balance Sheet As the diagram on the previous page indicates, nonoperating assets and liabilities are primarily financial in nature and include short and long-term investments in marketable securities, discontinued operations, and borrowings of interest-bearing debt (short term notes and interest payable, current portion of long-term debt, bonds and notes payable, and capitalized lease obligations), and stockholders’ equity. GAAP Balance Sheet Nonoperating (Financial) Items Highlighted Current Assets Current Liabilities Cash and Cash Equivalents Accounts Payable Short term Investments Accrued Liabilities Accounts Receivable Short term Notes and Interest Payable Inventories Deferred Tax Liabilities Prepaid Expenses Current Maturities of Long term Debt Deferred Tax Assets
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Handout_04_(APSCW_-_F2009) - FINANCIALACCOUNTING...

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