lecture 08 - Business Finance Lecture 8 Review of the...

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40 Business Finance Lecture 8 Review of the Previous Lecture ± Cash Flow Statement ± Financial Statements Analysis ± Significance ± Common Size Analysis Topics under Discussion ± Financial Statements Analysis ± Common Size Analysis (Cont.) ± Ratio Analysis ± Short-term solvency, or liquidity, ratios ² Current Ratio ² Acid Test (Quick) ratio ² Cash ratio Common-Size Statements ± One very common and useful way of standardized comparison is to work with percentages instead of dollars. ± So, a standardized financial statement presenting all items in percentages is called a common- size statement. ± Balance sheet items are shown as a percentage of total assets and income statement items as a percentage of sales. A2Z Inc., Balance Sheet A2Z Inc. Balance Sheet as of December 31 ($ in millions) Assets 20X1 20X2 Current Assets Cash $ 84 $ 98 Accounts receivable 165 188 Inventory 393 422 Total $ 642 $708 Fixed assets Net plant and equipment 2,731 2,880 Total assets $3,373 $3,588 A2Z Inc., Balance Sheet Liabilities and equity 20X1 20X2 Current liabilities Accounts payable $ 312 $ 344 Notes payable 231 196 Total $ 543 $ 540
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41 Long-term debt 531 457 Stockholders’ equity Common stock and paid-in surplus 500 550 Retained earnings 1,799 2,041 Total $2,299 $2,591 Total liabilities and equity $3,373 $3,588 A2Z Inc., Common-Size Balance Sheet Assets 20X1 20X2 Current Assets Cash 2.5% 2.7% Accounts receivable 4.9 5.2 Inventory 11.7 11.8 Total 19.1% 19.7% Fixed assets Net plant and equipment 80.9% 80.3% Total assets 100.0% 100.0% A2Z Inc., Common-Size Balance Sheet Liabilities and equity 20X1 20X2 Current liabilities Accounts payable 9.2% 9.6% Notes payable 6.8 5.5 Total 16.0% 15.1% Long-term debt 15.7% 12.7% Stockholders’ equity Common stock and paid-in surplus 14.8% 15.3% Retained earnings 53.3 56.9 T o t a l 6 8 . 1 7 2 . 2 Total liabilities and equity 100.0% 100.0% A2Z Inc., Common-Size Balance Sheet More on Standardized Statements Suppose we ask: “What happened to A2Z’s net plant and equipment (NP&E) over the period?” ± Based on the 20X1 and 20X2 B/S, NP&E rose from $2,731 to $2,880, so NP&E rose by $149. ± Did the firm’s NP&E go up or down? Obviously, it went up, but so did total assets. In fact, looking at the standardized statements, NP&E went from 80.9% of total assets to 80.3% of total assets. A2Z Inc., Common-Size Balance Sheet More on Standardized Statements ± If we standardized the 20X2 numbers by dividing each by the 20X1 number, we get a common base year statement. In this case, $2,880 / $2,731 = 1.0545, so NP&E rose by 5.45% over this period.
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42 ± If we standardized the 20X2 common size numbers by dividing each by the 20X1 common size number, we get a combined common size , common base year
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lecture 08 - Business Finance Lecture 8 Review of the...

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