Using the Financial Statements

# Using the Financial Statements - Using the Financial...

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Using the Financial Statements In Chapter 1 we introduced the four financial statements. We discussed how these statements provide information about a company's performance and financial position. In this chapter we extend this discussion by showing you specific tools that you can use to analyze financial statements in order to make a more meaningful evaluation of a company. Ratio Analysis Ratio analysis expresses the relationship among selected items of financial statement data. A ratio expresses the mathematical relationship between one quantity and another. The relationship is expressed in terms of either a percentage, a rate, or a simple proportion. To illustrate, Best Buy has current assets of \$9,081 million and current liabilities of \$6,301 million. We can determine a relationship between these accounts by dividing current assets by current liabilities, to get 1.44. The alternative means of expression are: Current assets are 144% of current liabilities. Current assets are 1.44 times as great as current liabilities. The relationship of current assets to current liabilities is 1.44:1. For analysis of the primary financial statements, we classify ratios as follows.

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Illustration 2-9 Financial ratio classifications Ratios can provide clues to underlying conditions that may not be apparent from examination of the individual items on the financial statements. However, a single ratio by itself is not very meaningful. Accordingly, in this and the following chapters we will use various comparisons to shed light on company performance: 1. Intracompany comparisons covering two years for the sam 2. Industry-average comparisons based on average ratios for p 3. Intercompany comparisons based on comparisons with a co Using the Income Statement Best Buy Company generates profits for its stockholders by selling electronics. The income statement reports how successful it is at generating a profit from its sales. The income statement reports the amount earned during the period (revenues) and the costs incurred during the period (expenses). Illustration 2-10 shows a simplified income statement for Best Buy. Pixtal/SUPERSTOCK. Illustration 2-10 Best Buy's income statement
From this income statement we can see that Best Buy's sales and net income both increased during the period. Net income increased from \$1,140 million to \$1,377 million. Best Buy's primary competitor is Circuit City. Circuit City reported a net loss of \$10.2 million for the year ended February 28, 2007. To evaluate the profitability of Best Buy, we will use ratio analysis.

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## Using the Financial Statements - Using the Financial...

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