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Chapter 13

Chapter 13 - Chapter 13 Financial Statement Analysis...

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Chapter 13: Financial Statement Analysis

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Financial Statement Analysis Purpose Firms strategic decisions as reflected in the financial statements Industry variations Alternative accounting methods Benchmarks Common size financial statements
Benchmarks Trend analysis Comparing numbers/ratios for a given firm through time Horizontal analysis Vertical analysis Cross-sectional analysis Comparing numbers/ratios across a set of firms at a given point in time Forecast results (expectations) Pre-set numbers (Rules of thumb)

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Common-size Financial Statements Income Statement Set net sales to 100% and recast all the numbers for a given income statement as a percentage of net sales Balance Sheet Set total assets to 100% and recast all the numbers for a given balance sheet as a percentage of total assets Statement of Cash Flows Not applicable
Liquidity Analysis Working Capital Current ratio Accounts receivable turnover Inventory turnover Cash operating cycle

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Solvency Analysis Debt-to-Equity ratio = Total Liabilities / Shareholders Equity Times Interest Earned = Income before interest / Interest Expense
Profitability Analysis Return on Assets = Return on sales x Asset turnover ratio Return on common stockholders’ equity = Profit margin ratio x asset turnover ratio x Financial leverage ratio Gross profit ratio

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Problem 13-5: Basic Financial Ratios The accounting staff of CCB enterprises has completed the financial statements for the 2008 calendar year. The statement of income for the current year and comparative statements of financial position for 2008 and 2007 follow: - See text (page 702) Required: 1.Calculate the following financial ratios for 2008 for CCB Enterprises: a. Times interest earned b. Return on total assets c. Return on common stockholders’ equity d. Debt-equity ratio (at December 31, 2008) e. Current ratio (at December 31, 2008) f. Quick (acid-test) ratio (at December 31, 2008) g. Accounts receivable turnover ratio (assume that all sales are on credit)
Problem 13-5: Basic Financial Ratios h. Number of days’ sales in receivables i. Inventory turnover ratio (assume that all purchases are on credit) j. Number of days’ sales in inventory k. Number of days’ sales in cash operating cycle 2. Prepare a few brief comments on the overall financial health of CCB Enterprises. For each comment, indicate any information that is not provided in the problem and that you would need to fully evaluate the company’s financial health.

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