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Chapter_03_upload-1 - Chapter 3 . Working With Financial...

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Chapter 3 . Working With Financial Statements
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3-2 Key Concepts and Skills Two approaches: ratio vs. value analysis Know how to compute and interpret important financial ratios Understand the problems and pitfalls in financial statement analysis
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3-3 Sample Balance Sheet 2003 2002 2003 2002 Cash 696 58 A/P 307 303 A/R 956 992 N/P 26 119 Inventory 301 361 Other CL 1,662 1,353 Other CA 303 264 Total CL 1,995 1,775 Total CA 2,256 1,675 LT Debt 843 1,091 Net FA 3,138 3,358 C/S 2,556 2,167 Total Assets 5,394 5,033 Total Liab. 5,394 5,033 Numbers in millions
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3-4 Sample Income Statement Revenues 5,000 Cost of Goods Sold 2,006 Expenses 1,740 Depreciation 116 EBIT 1,138 Interest Expense 7 Taxable Income 1,131 Taxes 442 Net Income 689 EPS 3.61 Dividends per share 1.08 Numbers in millions, except EPS & DPS
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3-5 Sources and Uses Sources Cash inflow – occurs when we “sell” something Decrease in asset account ( Sample B/S ) Accounts receivable, inventory, and net fixed assets Increase in liability or equity account Accounts payable, other current liabilities, and common stock Uses Cash outflow – occurs when we “buy” something Increase in asset account Cash and other current assets Decrease in liability or equity account Notes payable and long-term debt
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3-6 Ratio Analysis Ratios also allow for better comparison through time or between companies As we look at each ratio, ask yourself what the ratio is trying to measure and why is that information is important Ratios are used both internally and externally
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3-7 Categories of Financial Ratios Short-term solvency or liquidity ratios Long-term solvency or financial leverage ratios Asset management or turnover ratios Profitability ratios Market value ratios
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3-8 Computing Liquidity Ratios Current Ratio = CA / CL 2256 / 1995 = 1.13 times Quick Ratio = (CA – Inventory) / CL (2256 – 301 ) / 1995 = 0.98 times Cash Ratio = Cash / CL 696 / 1995 = .35 times
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3-9 Computing Long-term Solvency Ratios Total Debt Ratio = (TA – TE) / TA (5394 – 2556) / 5394 = 52.61% Debt/Equity = TD / TE (5394 – 2556) / 2556 = 1.11 times Equity Multiplier = TA / TE = 1 + D/E 1 + 1.11 = 2.11
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3-10 Computing Inventory Ratios Inventory Turnover = Cost of Goods Sold /
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Chapter_03_upload-1 - Chapter 3 . Working With Financial...

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