IMCh02 - CHAPTER 2 Financial Statements and Analysis...

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CHAPTER 2 Financial Statements and Analysis INSTRUCTOR’S RESOURCES Overview This chapter examines the key components to the stockholders' report: the income statement, balance sheet, statement of retained earnings, and the statement of cash flows. On the income statement and balance sheet, the major accounts/balances are reviewed for the student. The rules for consolidating a company's foreign and domestic financial statements (FASB No. 52) are described. Following the financial statement coverage the chapter covers the evaluation of financial statements using the technique of ratio analysis. Ratio analysis is used by prospective shareholders, creditors, and the firm's own management to measure the firm's operating and financial health. Three types of comparative analysis are defined: cross-sectional analysis, time-series analysis, and combined analysis. The ratios are divided into five basic categories: liquidity, activity, debt, profitability, and market. Each ratio is defined and calculated using the financial statements of the Bartlett Company. A brief explanation of the implications of deviation from industry standard ratios is offered, with a complete (cross-sectional and time-series) ratio analysis of Bartlett Company ending the chapter. The DuPont system of analysis is also integrated into the example. PMF Tutor : Financial Ratios This section of the Gitman Tutor generates problems to give the student practice calculating liquidity, activity, debt, profitability, and market ratios. PMF Problem-Solver : Financial Ratios This module allows the student to compute all the financial ratios described in the text. There are three options: all ratios, families of ratios, and individual ratios. 19
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Part 1 Introduction to Managerial Finance PMF Templates Spreadsheet templates are provided for the following problems: Problem Topic Problem 2-4 Calculation of EPS and retained earnings Problem 2-5 Balance sheet preparation Problem 2-6 Impact of net income on a firm’s balance sheet Problem 2-8 Statement of retained earnings Problem 2-15 Debt analysis Study Guide Suggested Study Guide examples for classroom presentation: Example Topic 1 Basic ratio calculation 2 Common-size income statement 3 Evaluating ratios 20
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Chapter 2 Financial Statements and Analysis ANSWERS TO REVIEW QUESTIONS 2-1 The purpose of each of the 4 major financial statements are: Income Statement - The purpose of the income statement is to provide a financial summary of the firm’s operating results during a specified time period. It includes both the sales for the firm and the costs incurred in generating those sales. Other expenses, such as taxes, are also included on this statement. Balance Sheet – The purpose of the balance sheet is to present a summary of the assets owned by the firm, the liabilities owed by the firm, and the net financial position of the owners as of a given point in time. The assets are often referred to as investments and the liabilities and owners equity as financing. Statement of Retained Earnings
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IMCh02 - CHAPTER 2 Financial Statements and Analysis...

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