Review of Financial Statements and Ratios
I. Basic Financial Statements
A. Income Statement - summary of firm’s accounting revenues, expenses, and profits over some time period
Ex. => see Consolidated Statements of Income for Dell Inc. from the 10-k filed with SEC for fiscal 2005
B. Balance Sheet - summary of accounting values of a firm’s assets and claims against those assets
Ex. => see Consolidated Statements of Financial Position for Dell Inc. from the 10-k for fiscal 2005
II. Standardized Financial Statements
1. Common-size balance sheets
=> compute all accounts as a percent of total assets
2. Common-size income statements
=> compute all line items as a percent of sales
Uses for common size
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Dell (2005) = 4461/16 = 278.81
EBIT = 3043 + 16 + 1402 = 4461
Dell (2004) = 3738/14 = 267.00
EBIT = 2645 + 14 + 1079 = 3738
Notes:
1) high and/or increasing ratio indicates: strong ability to make interest payments with earnings
2) also called interest coverage ratio
3. Cash Coverage ($CR) = (EBIT+Depr)/IE
where: Depr = depreciation
Ex.
Dell (2005) = (4461+334)/16 = 299.69
Dell (2004) = (3738+263)/14 = 285.79
Note: high and/or increasing ratio indicates: strong ability to pay interest with cash (and pay interest with cash not earnings).
General note on long-term solvency ratios: low debt ratio and high coverage may indicate too little use of debt
F. Asset Management, or Turnover, Ratios
=> indicate how efficiently generate sales with assets
1. Inventory Turnover (IT) = COGS / I
where: COGS = cost of goods sold
Ex.
Dell (2005) = 40,190/459 = 87.56
Dell (2004) = 33,892/327 = 103.65
Notes:
1) high and/or increasing turnover indicates: efficient inventory management since have turned over (sold) inventory many times during year alternatively: had high/increasing sales per dollar of inventory
2) too high may indicate risk of stock-outs and lost sales
2. Days’ Sales in Inventory (DSI) = 365 / IT
Ex.
Dell (2005) = 365/87.56 = 4.17
Dell (2004) = 365/103.64 = 3.52
Note: low and/or falling ratio indicates that: on average it doesn’t take long to sell
Fraser, L. M., & Ormiston, A. (201). Understanding financial statements (9th ed.). Upper Saddle River, NJ: Prentice Hall.
The higher the ratio the better the company stands with ability to pay loans. The four quarters for quick ratios in year one are as follows; 1.48, -.14, .25, 1.29, and year 2-4 are as follows; 3.26, 3.88, 5.11, 5.69 (NetMBA, 2010.)
The balance sheet (BS) is significant to a business due to its ability to provide a “snapshot” of a company’s assets and liabilities at any given time. This financial document is a cursory representation of a business’s health. The use of comparative BS whether it be yearly, quarterly, or monthly provides the interested parties a tool to observe trends that are positive, negative, or neutral to a company’s financial health (Finkler, Jones, and Koyner,2013) .
Mohana, R (2011). Financial Statement Analysis and Reporting. New Delhi: Asoke K. Ghosh, PHI Learni
| |financial statements related to cash and cash equivalents, receivables, and inventories. | | |
Learning Objective: 04-03 Present an income statement with earnings per share, statement of stockholders equity, balance sheet, and statement of cash flows.
In regards to inventory turnover in 2009, CVS experienced a favorable amount of inventory on hand compared to cost of goods sold. When comparing this result to 2011 it climbed to 10.66, which improves the company’s regulation of managing inventory. From 2009 to 2010 there was an improvement
(TCO 5) In the annual report, where would a financial statement reader find out if the company’s financial statements give a fair depiction of its financial position and operating results?
The financial statements are showing that the firm is fiscally sound. This helps executives to capitalize on new opportunities in order to increase the company's earnings. For example, three important areas which are showing how the firm is enhancing their profits margins are in the sales, net earnings and dividends per common shareholder from 2010 to 2012. ("Built to Deliver," 2012)
The notes to the financial statements can reveal a lot about the details of the line item in question. It is often said that to fully understand financial statements, one must read the notes. The company that I have selected is Starbucks, and to that end their financial statements are available online at MSN Moneycentral. To read the notes, however, I will need the annual report.
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If this ratio is high means company owns too many debts which may decrease their
The last one is the Balance Sheet which tells a person the lists of assets he has, the list of
Balance sheets and income statements are a snapshot of a company’s stability and financial situation. Combined the statements show the income, expenses, and stockholder’s equity in the company. These statements are often analyzed by financial institutions when a company comes to them needing a loan. Stockholders and other investors also look at these statements to make sure their investment will return a profit for them. This paper will look at four different companies and their balance sheets and income statements. The companies are Eastman Chemical Company, Covenant Transportation