Financial Statement Analysis, Study notes of Accounting

Download Financial Statement Analysis and more Study notes Accounting in PDF only on Docsity! 1 Financial Statement Analysis 2 Statement of Cash Flows For the year ended December 31, 20x2 Net cash flows from operating activities Net cash used by investing activities Net cash provided by financing activities Increase in cash balance Beginning cash balance (12/31/x1) BALANCE SHEET Ending cash balance (12/31/x2) BALANCE SHEET As of December 31, 20x1 As of December 31, 20x2 Income Statement Cash For the year ended December 31, 20x2 Cash Other Current Assets Other Current Assets Long-term Investments Revenues Long-term Investments Long-term Assets Expenses Long-term Assets Intangible Assets Net Income Intangible Assets Total Assets Total Assets Statement of Changes in Owner's Equity Current Liabilities For the year ended December 31, 20x2 Current Liabilities Long-term Liabilities Long-term Liabilities Joe Owner, capital, 1/1/x2 Joe Owner, Capital Plus: Investments by owner Joe Owner, Capital Plus: Net Income Total Liabilities and Equity Less: Withdrawals by owner Total Liabilities and Equity Joe Owner, capital, 12/31/x2 1,700$ 18,615$ 740$ 6,940$ Liabilities and Owner's Equity 1,085$ 200$ 10,935$ 18,615$ 10,935$ Assets Liabilities and Owner's Equity (000) (000) (000) 5,880$ 4,795$ 1,085$ (4,100)$ 10,050$ -$ 10,050$ 16,000$ 1,000$ (000) 100$ 1,300$ 3,000$ 220$ 1,195$ 4,000$ 11,500$ Assets 4,950$ (000) 1,470$ 2,750$ 120$ 100$ 220$ 10,000$ 1,600$ 16,000$ The Interrelationships of the 4 Financial Statements 5 Changes are measured against a base year with the following formula. Current year amount — Base year amount ——————————————————————— Base year amount Change since base period HORIZONTAL ANALYSIS HORIZONTAL ANALYSIS OF BALANCE SHEET Assets Current assets Plant assets (net) Intangible assets Total assets Liabilities Current liabilities Long-term liabilities Total liabilities Stockholders’ Equity Common stock, $1 par Retained earnings Total stockholders’ equity Total liabilities and stockholders’ equity Increase or (Decrease) during 2003 2003 2002 Amount Pereent $1,020,000 $ 945,000 $ 75,000 7.9% 300,000 632.500 167,500 26.5% 15,000 17.500 (2,500) (14.3%) $1,835,000 395,000 0,000 15.0% $ 344500 $ 303,000 —$ 41,500 13.7% 487,500 497,000 (9.500) (1.9%) $32,000 300,000 32,000 4.0% 275,400 270,000 5,400 2.0% 727,600 325.000 202,600 38.6% 1,003,000 795,000 208,000. 26.2% $1,835,000 $1,595,000 $240,000 15.0% HORIZONTAL ANALYSIS OF INCOME STATEMENT Sales Sales returns and allowances Net sales Cost of goods sold Gross profit Selling expenses Administrative expenses Total operating expenses Income from operations Other revenues and gains Interest and dividends Other expenses and losses Interest expense Income before income taxes Income tax expense Net income Increase or (Decrease) during 2003 2003 2002 Amount Percent $2,195,000 $1,960,000 $235,000 12.0% 98,000 123,000 (25,000) (20.3%) 2,097,000 1,837,000 260,000 14.2% 1,281,000 1,140,000 141,000 12.4% $16,000 697,000 119,000 17.1% 253,000 211,500 41,500 19.6% 104,000 108.500 (4,500) (4.1%) 357,000 320,000 37,000 11.6% 459,000 377,000 82,000 21.8% 9.000 11,000 2,000) (18.2%) 36,000 40,500 (4,500) (1L1%) 432,000 347,500 84,500 24.3% 168,200 139,000 29,200 21.0% $ 263.800 $ 208.500 $ 55,300 26.5% 10 QUALITY DEPARTMENT STORE INC. Condensed Balance Sheets December 31 2003 2002 Amount Percent Amount Percent Assets Current assets $ 1,020,000 55.6% $ 945,000 59.2% Plant assets (net) 800,000 43.6% 632,500 39.7% Intangible assets 15,000 0.8% 17,500 1.1% Total assets $ 1,835,000 100.0% $ 1,595,000 100.0% Liabilities Current liabilities $ 344,500 18.8% $ 303,000 19.0% Long-term liabilities 487,500 26.5% 497,000 31.2% Total liabilities 832,000 45.3% 800,000 50.2% Stockholders’ Equity Common stock, $1 par 275,400 15.0% 270,000 16.9% Retained earnings 727,600 39.7% 525,000 32.9% Total stockholders’ equity 1,003,000 54.7% 795,000 49.8% Total liabilities and stockholders’ equity $ 1,835,000 100.0% $1,595,000 100.0% VERTICAL ANALYSIS OF BALANCE SHEET 11 QUALITY DEPARTMENT STORE INC. Condensed Income Statements For the Years Ended December 31 2003 2002 Amount Percent Amount Percent Sales $ 2,195,000 104.7% $ 1,960,000 106.7% Sales returns and allowances 98,000 4.7% 123,000 6.7% Net sales 2,097,000 100.0% 1,837,000 100.0% Cost of goods sold 1,281,000 61.1% 1,140,000 62.1% Gross profit 816,000 38.9% 697,000 37.9% Selling expenses 253,000 12.0% 211,500 11.5% Administrative expenses 104,000 5.0% 108,500 5.9% Total operating expenses 357,000 17.0% 320,000 17.4% Income from operations 459,000 21.9% 377,000 20.5% Other revenues and gains Interest and dividends 9,000 0.4% 11,000 0.6% Other expenses and losses Interest expense 36,000 1.7% 40,500 2.2% Income before income taxes 432,000 20.6% 347,500 18.9% Income tax expense 168,200 8.0% 139,000 7.5% Net income $ 263,800 12.6% $ 208,500 11.4% VERTICAL ANALYSIS OF BALANCE SHEET RATIO ANALYSIS Liquidity Ratios Measures of short-term ability of the enterprise to pay its maturing obligations and to QW, meet unexpected needs for cash Profitability Ratios area -y Measures of the income or | Revenues j - Pex es ; = e operating success of an enterprise S S for a given period of time Founded in 1892 ens Lye cel i u Solvency Ratios Measures of the ability of the enterprise to survive over a long period of time Profitability Ratio Formulas Earnings per share Price-earnings ratio Gross margin percentage Return on total assets Return on common stockholders’ equity (Net income - Preferred dividends) + Number of common shares outstanding Market price per share = Earnings per share Gross margin ~ Net sales [Net income + (Interest expense X (1 - Tax rate))] + Total assets (Net income - Preferred dividends) = Common stockholders’ equity 15 16 Turnover Ratios • Asset Turnover – Measures how efficiently assets are utilized • Accounts Receivable Turnover – Measures the number of times each year receivables are collected • Days’ Sales in Receivables – Measures the average number of days necessary to collect credit sales • Inventory Turnover – Measures the number of times each year inventory is sold • Days’ Sales in Inventory – Measures the average number of days necessary to sell all inventory Turnover Ratio Formulas Asset turnover Net sales = Total assets Accounts receivable turnover Net credit sales + Accounts receivable Days’ sales in receivables 365 = Accounts receivable turnover Inventory turnover Cost of goods sold = Inventory Days’ sales in inventory 305 + Inventory turnover 17 Summary of Ratio Formulas Profitability Ratios Earnings per share Price-earnings ratio Gross margin percentage Return on total assets Return on common stockholders’ equity Turnover Ratios (Net income — Preferred dividends) + Number of common shares outstanding Market price per share + Earnings per share Gross margin + Net sales [Net income + (Interest expense x (1 — Tax rate))] + Total assets (Net income — Preferred dividends) + Common stockholders’ equity Asset turnover Accounts receivable turnover Days’ sales in receivables Inventory turnover Days’ sales in inventory Debt Related Ratios Net sales + Total assets Net credit sales + Accounts receivable 365 + Accounts receivable turnover Cost of goods sold + Inventory 365 + Inventory turnover Current ratio Acid test (Quick ratio) Debt-to-equity ratio Times interest earned Current assets + Current liabilities [(Cash + Marketable securities) + Short- term receivables] + Current liabilities Total liabilities + Stockholders’ equity Operating income + Interest expense 20 21 LIMITATIONS OF F/S ANALYSIS Estimates Depreciation, allowances, contingencies Cost Historical data not adjusted for inflation/deflation Alternative methods FIFO, LIFO, Average Cost. Completed contract, percentage of completion Atypical data Seasonal accounting data may not be representative Firm diversification Conglomerates hard to identify with single industry.