Week 2 Lecture Notes r60211

Week 2 Lecture Notes r60211 - Lecture Notes Finance 220...

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Lecture Notes – Finance 220 – Week 2 1. Our lecture this week covers the topics of financial ratio analysis and forecasting. This lecture will be divided into several sections. As you listen to this presentation, you might want to follow along in the text. Although this presentation stands alone, it was designed to augment the text material. 2. The key concepts we will cover in Week 2 relate to ratio analysis and the use of ratios for measurement. We will explore the DuPont analysis and trend analysis. Our lecture will discuss the 3 financial statements that provide us the information for ratio analysis. In addition, we will explore the percent-of-sales method and the aspects that affect cash flow of firms. 3. Ratio analysis is a tool used by individuals to conduct a quantitative analysis of information in a company's financial statements. Ratios are calculated from current year numbers and are then compared to previous years, other companies, the industry, or even the economy to judge the performance of the company. Ratio Analysis is a form of Financial Statement Analysis that is used to obtain a quick indication of a firm's financial performance in several key areas. Ratio Analysis as a tool possesses several important features. 4. The types of categories of ratios we will examine include profitability ratios, liquidity ratios, asset utilization ratios and debt utilization ratios. Financial ratios are useful indicators of a firm's performance and financial situation. Most ratios can be calculated from information provided by the financial statements. Every firm is most concerned with its profitability. One of the most frequently used tools of financial ratio analysis is profitability ratios which are used to determine the company's bottom line. Profitability measures are important to company managers and owners alike. 5. Profitability ratios show a company's overall efficiency and performance. We can divide profitability ratios into two types: margins and returns. Ratios that show margins represent the firm's ability to translate sales dollars into profits at various stages of measurement. Ratios that show returns represent the firm's ability to measure the overall efficiency of the firm in generating returns for its shareholders. A Common-Size Income Statement lists each income item as a percent of sales. This method allows for easy review of the firm’s profitability in relation to the sales. 6. A common size statement analysis indicates the relation of each component to the whole. A common size statement analysis is a type of ratio analysis where in case of income statements, sales is the denominator (base). All items are expressed as a relation to it. As shown in this example, Net Sales is listed at 100%. All other accounts in the income statement are calculated as a percent of sales. In other words, Gross Profit of $25,913
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divided by Revenues of $70,134 is 36.9% of sales. Income taxes of $3,766 divided by Revenues of $70,134 equals 5.4% of sales. Common size Financial Statements are used
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Week 2 Lecture Notes r60211 - Lecture Notes Finance 220...

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