chap. 2-analysis of financial stmt and cfs-1
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TOPIC 2
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ANALYSIS OF FINANCIALSTATEMENTS AND CASH
FLOWS
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Part A1. The Income Statement
It is aso !no"n as Pro#t$Loss Statement
It meas%res the res%ts o& #rm's o(eration o)er a
s(eci#c (erio*.Income Statement for XYZ Co. for the period
ending 31st of August 21!
Income Statement for XYZ Co. for the "ear ended31st of August 21!
+1st Se(t 2,1- -1st A%/ 2,10
The ottom ine o& the income statement sho"s the#rm's pro#t or $oss &or a period.
Saes E3(enses 4 Pro#ts or %oss
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Income Statement Terms
&e'enue (Sa$es)Mone5 *eri)e* &rom sein/ the com(an5's (ro*%ct or ser)ice
Cost of *oods So$d (CO*S)
The cost o& (ro*%cin/ or ac6%irin/ the /oo*s or ser)ices toe so*
Operating +,pensesE3(enses reate* to mar!etin/ an* *istri%tin/ the (ro*%ct or
ser)ice an* a*ministerin/ the %siness
-inancing Costs The interest (ai* to cre*itors
Ta, +,pensesAmo%nt o& ta3es o"e*7 ase* %(on ta3ae income
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Fi/%re -81
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Fi/%re -81 +cont.
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Tae -81
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2. The
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Fi/%re -8-
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Current assets com(rise assets that arereati)e5 i6%i*7 or e3(ecte* to e con)erte* intocash "ithin 12 months. C%rrent assets t5(ica5
inc%*e=Cash
Acco%nts Becei)ae +(a5ments *%e &rom c%stomers "ho%5 on cre*it
In)entor5 +ra" materias7 "or! in (rocess7 an* #nishe*/oo*s he* &or e)ent%a sae
Other assets +e3.= Pre(ai* e3(enses are items (ai* &or ina*)ance
Balance Sheet Terms: Assets
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-i,ed Assets 0 Inc%*e assets that "i e %se*&or more than one 5ear. Fi3e* assets t5(ica5inc%*e=Machiner5 an* e6%i(ment
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et (%iai$ities) Mone5 that has een orro"e* &rom a cre*itor an* m%st e re(ai* at
some (re*etermine* *ate. Det co%* e current +m%st e re(ai* "ithin t"e)e months or long-
term +re(a5ment time e3cee*s one 5ear.
Current et=Acco%nts (a5ae +Cre*it e3ten*e* 5 s%((iers to a #rm "hen it
(%rchases in)entoriesAccr%e* e3(enses +Short term iaiities inc%rre* in the #rm's
o(erations %t not 5et (ai* &or
Short8term notes +
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+4uit"5 Shareho*er's in)estment in the #rm in the &orm o&(re&erre* stoc! an* common stoc!. Pre&erre* stoc!ho*erseno5 (re&erence "ith re/ar* to (a5ment o& *i)i*en* an*seniorit5 at settement o& an!r%(tc5 caims.
Treasur" Stoc65 Stoc! that ha)e een re8(%rchase* 5 thecom(an5.
&etained +arnings5 C%m%ati)e tota o& a the net income o)er the i&e o& the #rm7 ess common stoc! *i)i*en*s that
ha)e een (ai* o%t o)er the 5ears. Note retaine* earnin/sare not e6%a to har* cash
Balance Sheet Terms: Equity
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E
ASS+TS ( A)C%rrent Assets
Fi3e* Assets
Tota Assets
%IA/I%ITI+S (L)C%rrent LiaiitiesLon/8Term Liaiities
Tota Liaiities
O78+&9S +:;ITY(E)Pre&erre* Stoc!
Common Stoc!Betaine* earnin/s
Tota O"ner's E6%it5 Tota iaiities >
E6%it5
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Tae -8-
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Net Wor!in/ Ca(ita
8et 7or6ing Capita$
4 C%rrent assets c%rrent iaiities
Lar/er the net "or!in/ ca(ita7 etter the #rm's aiit5to re(a5 its *et
Net "or!in/ ca(ita can e (ositi)e or ero or ne/ati)e.It is /enera5 (ositi)e.
An increase in net "or!in/ ca(ita ma5 not a"a5s e/oo* ne"s. For e3am(e7 i& the e)e o& in)entor5 /oes%(7 c%rrent assets "i increase an* th%s net "or!in/ca(ita "i aso increase. Ho"e)er7 increasin/ in)entor5e)e ma5 "e e a si/n o& inaiit5 to se.
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Det Batio
Det ratio is the (ercenta/e o& assets that are#nance* 5 *et.
Det ratio is an in*ication o& #nancia ris!.Genera57 hi/her the ratio7 the more ris!5 the #rmis7 as #rms ha)e to (a5 interest on *et re/ar*esso& the earnin/s or cash o" sit%ation.
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What Is the Difference Between
"Source" & "se! of cash
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Source
Source is a term used to refer to the
receipt of an economic resource ina transaction.
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se
Use is a term used to refer to the
spending of an economic resourcein a transaction.
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• An increase in an asset a use of cash• An increase in liability a source of cash• An increase in equity a source of cash• A #ecrease in asset a source of cash
• A #ecrease in liability a use of cash• A #ecrease in equity a use of cash
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The $ash %low Statement
The ash !lo" Statement is the third
report in the !inancial Statement
pac#age
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-. Meas%rin/ Cash Fo"s
Pro#ts in the #nancia statements arecac%ate* on accr%a asisG rather thancash asisG +see ne3t si*e &or accr%aasis acco%ntin/.
Th%s (ro#ts are not e6%a to cash.
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Accrual Accountin
Definition: Accounting method
that records revenues and
expenses when they are incurred,regardless of when cash is
exchanged. The term "accrual"
refers to any individual entryrecording revenue or expense in
the absence of a cash transaction
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Accr%a
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Fi/%re -8: Ho" to meas%re a #rm's cash o"s
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Three sources of cash
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Income Statement Con'ersion5
-rom Accrua$ to Cash /asis T"o ste(s=A** ac! *e(reciation +as it is a non8cash
e3(ense to net income
S%tract an5 %ncoecte* saes +i.e.increase in acco%nts recei)ae an* cash(a5ment &or in)entories +i.e. increase inin)entories ess increase in acco%nts
(a5aes
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Fi/%re -8;
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Tae -89
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0. Income Ta3es an*Finance
Computing Ta,a$e Income forCorporation
*ross IncomeDoar saes &rom a (ro*%ct or ser)ice ess cost o&
(ro*%ction or ac6%isition
Ta,a$e Incomeross income ess ta3 *e*%ctie e3(enses7 (%s
interest income recei)e* an* *i)i*en* income recei)e*
Ta3 De*%ctie E3(ensesInc%*e O(eratin/ e3(enses +mar!etin/7 *e(reciation7
a*ministrati)e e3(enses an* interest e3(enseDi)i*en*s (ai* are not *e*%ctie
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Tae -8:Com(%tin/ Ta3ae Income +K,,,'s
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%iure '(
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$$© 2011 Pearson Prentice Hall. All rights reserved.
Part
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$%© 2011 Pearson Prentice Hall. All rights reserved.
ses o& Financia Batios=Within the Firm
I*enti&5 *e#ciencies in a #rm's (er&ormancean* ta!e correcti)e action.E)a%ate em(o5ee (er&ormance an*
*etermine incenti)e com(ensation.Com(are the #nancia (er&ormance o& *i?erent*i)isions "ithin the #rm.Pre(are7 at oth #rm an* *i)ision e)es7
#nancia (roections.
n*erstan* the #nancia (er&ormance o& the#rm's com(etitors.E)a%ate the #nancia con*ition o& a maor
s%((ier.
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ses o& Financia Batios=O%tsi*e the Firm
-inancia$ ratios are used "5
Len*ers in *eci*in/ "hether or not to ma!e aoan to a com(an5.
Cre*it8ratin/ a/encies in *eterminin/ a #rm'scre*it "orthiness.
In)estors +shareho*ers an* on*ho*ers in*eci*in/ "hether or not to in)est in a com(an5.
Maor s%((iers in *eci*in/ to "hether or not to/rant cre*it terms to a com(an5.
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The Limitations o& FinanciaBatio Ana5sis
It is sometimes *ic%t to i*enti&5 in*%str5cate/ories or com(arae (eers.
The (%ishe* (eer /ro%( or in*%str5 a)era/es
are on5 a((ro3imations. In*%str5 a)era/es ma5 not (ro)i*e a *esirae
tar/et ratio.
Acco%ntin/ (ractices *i?er "i*e5 amon/ #rms.
A hi/h or o" ratio *oes not a%tomatica5 ea* toa s(eci#c conc%sion.
Seasons ma5 ias the n%mers in the #nanciastatements.
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1Li6%i*it5 Batios=
1 C%rrent ratio 4 C%rrent assets$C%rrent iaiities This ratio meas%res the *e/ree o& i6%i*it5 5 com(arin/
its c%rrent assets to its c%rrent iaiities. Hi/her #/%re
means that the %siness #nancia con*ition is etter as ithas eno%/h i6%i* assets &or its o(eration.
2 %ic! ratio 4 +c%rrent assets8in)entor5$c%rrent iaiities
This ratio is a more strin/ent meas%re o& i6%i*it5 than the
c%rrent ratio. It e3c%*es in)entories an* other c%rrentassets that are east i6%i* &rom c%rrent assets. Hi/her ratiosho"s that the %siness has eno%/h 6%ic! assets or i6%i*assets to co)er its short term *et imme*iate5.
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2ASSETMANAEMENT$ACTIITY$EFFICIENCYBATIOS
1 A)era/e coection (erio*s +ACP4 Acco%nts recei)ae$+Ann%a cre*itsaes$-:9
ACP 4 Acco%nts recei)ae$Dai5 saes
The ratio meas%res ho" on/ a #rm ta!es to coect its cre*itacco%nts. The o"er the #/%re is etter.
2 Acco%nt recei)ae t%rno)er 4 saes$acco%nts recei)aes
This ratio meas%res ho" o&ten acco%nts recei)aes are roe* o)erG*%rin/ a 5ear. Hi/her ratio i%strates that the #rm can coect its*et more &re6%ent an* th%s has &e" a* *ets.
- In)entor5 t%rno)er 4 costs o& /oo* so*$in)entor5
It meas%res the n%mer o& times a #rm's in)entories are so* an*re(ace* *%rin/ the 5ear. Hi/her ratio in*icates that in)entor5 can eso* an* re(ace* more &re6%ent5.
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0 Fi3e* asset t%rno)er 4 saes$net #3e* assets
This ratio is an o)era meas%re o& assetecienc5 ase* on the reation et"een
#rm's saes an* the tota assets. Hi/herratio in*icates that #rm is mana/in/ itsassets more e?ecti)e5.
9 Tota asset t%rno)er 4 saes$tota assets
Hi/her ratio is &a)ore* eca%se it in*icatesthe e?ecti)eness o& the #rm in /eneratin/saes &rom its tota assets.
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-PBOFITA
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0 Bet%rn on assets +BOA 4 Net income$tota assets
This e)a%ates ho" e?ecti)e5 the com(an5em(o5s its assets to
/enerate a ret%rn. It meas%res ecienc5. Hi/herratio is etter.
9 Bet%rn on e6%it5 +BOE 4 Net income$ commone6%it5
Bet%rn on e6%it5 is the ottom ine meas%re &or the
shareho*ers7 meas%rin/ the (ro#ts earne* &or each*oar in)este* in the #rmQs stoc!. Hi/her ratio is&a)ore* eca%se the #rm can /enerate etter ret%rnto the o"ner o& the #rm.
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0LEEBAE BATIOS
1 Det ratio 4 tota *et$tota assets This ratio meas%res the e3tent to "hich a #rm has een #nance*"ith *et. More *et #nancin/ res%ts in more #nancia ris!.
2 Times interest earne*4 E
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9MABET ALE BATIOS
1 Earnin/ (er share +EPS 4 Net income$n%mer o& shares o%tstan*in/
It re(resents the (ortion o& a #rmQs earnin/s that is aocate* to eachshare o& common stoc!.
2 Price earnin/ ratio +PE 4 (rice (er share$earnin/s (er share
The ratio in*icates ho" m%ch in)estors are "iin/ to (a5 (er *oar o&
c%rrent earnin/s. As s%ch7 hi/h P$E Batios are associate* "ith /ro"thstoc!s. The most common meas%re o& ho" e3(ensi)e a stoc! is.
- Price +mar!et to oo! ratio4(rice (er share$oo! )a%e (er share
This ratio meas%res ho" m%ch a com(an5 "orth at (resent7 incom(arison "ith the amo%nt o& ca(ita in)este* 5 c%rrent an* (astshareho*ers into it.
0
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Table ()
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Table (*
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1 LIIDITY BATIO
&ATIO -O&>;%A A?I+S I8C. P++& *&O;P
1 C%rrent ratio C%rrentassets$c%rrent
iaiities
K10-m$K:0m42.2-
1.@,
2 %ic! ratio +c%rrent assets8in)entor5$c%rren
t iaiities
+K10-m8K@0m$K:0m 4,.2
,.@
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2ASSETMANAEMENT$ACTIITY$EFFICIENCYBATIOS
&ATIO -O&>;%A A?I+S I8C. P++& *&O;P
1 A)era/ecoection(erio*s +ACP
Acco%ntsrecei)ae$
+Ann%a cre*itsaes$-:9
K-:m$+K:,,m$-:94 21., *a5s
29 *a5s
2Acco%ntrecei)aet%rno)er
saes$acco%ntsrecei)aes
K:,,m$K-:m41:.:;3
10.:3
-In)entor5
t%rno)er
costs o& /oo*
so*$in)entor5
K0:,m$K@0m
49.0@3
;.,,3
0Fi3e* assett%rno)er
saes$net #3e*assets
K:,,m$K29m42.,-3
1.;93
9Tota asset saes$tota K:,,m$K0-@m4
1.193© 2011 Pearson Prentice Hall. All rights reserved.
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-PBOFITA;%A A?I+S I8C. P++& *&O;P
1ross (ro#tmar/in
/ross(ro#t$saes
K10,m$K:,,m4,.2--42-.-
29
2Net (ro#t
mar/in
Net
income$saes
K02m$K:,,m
4,.,;4;
:.9
-O(eratin/Pro#tMar/in+OPM
O(eratin/(ro#t$Saes
K;9m$K:,,m4,.129412.9
19.9
0Bet%rn onassets +BOA
Netincome$tota
assets
K02m$K0-@m4,.,:4.:
1,
9Bet%rn one6%it5 +BOE
Net income$common e6%it5
K02m$K2,-m4,.2,;42,.;
1@
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0LEEBAE BATIOS
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&ATIO -O&>;%A A?I+S I8C. P++& *&O;P
1Det ratio tota *et$totaassets
K2-9m$K0-@m4,.9-;49-.;
-9
2Timesinterest earne*
E
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9MABET ALE BATIOS
&ATIO -O&>;%A A?I+S I8C. P++& *&O;P
1Earnin/ (ershare +EPS
Netincome$n%mer
o& shareso%tstan*in/
K02m$2,m4K2.1,
K1.@
2 Price earnin/ratio +PE
(rice (ershare$earnin/s
(er share
+ass%me the
mar!et (rice &orDa)ies stoc!"as K-2 (er
share
K-2$K2.1,419.203
1.,3
-Price +mar!etto oo! ratio
(rice (ershare$oo!
K-2$K1,.194-.193
-.;3
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