Professional Documents
Culture Documents
Three
Working With
Financial Statements
3.2
McGraw-Hill/Irwin
3.3
Chapter Outline
Cash Flow and Financial Statements: A Closer
Look
Standardized Financial Statements
Ratio Analysis
The Du Pont Identity
Using Financial Statement Information
McGraw-Hill/Irwin
3.4
2000
1999
2000
1999
3,171
6,489 A/P
313,286
340,220
1,095,118
1,048,991 N/P
227,848
86,631
Inventory
388,947
295,255 Other CL
1,239,651
1,098,602
Other CA
314,454
232,304 Total CL
1,780,785
1,525,453
Total CA
1,801,690
1,583,039 LT Debt
1,389,615
871,851
Net FA
3,129,754
2,535,072 C/S
1,761,044
1,648,490
Total Assets
4,931,444
4,931,444
4,118,111
McGraw-Hill/Irwin
3.5
4,335,491
1,762,721
Expenses
1,390,262
Depreciation
362,325
EBIT
820,183
Interest Expense
52,841
Taxable Income
Taxes
767,342
Net Income
471,916
295,426
EPS
2.41
0.93
McGraw-Hill/Irwin
3.6
Uses
Cash outflow occurs when we buy something
Increase in asset account
Everything except cash & equivalents is a use
3.7
McGraw-Hill/Irwin
3.8
Operating Activity
141,217
Net Income
471,916
Increase in LT Debt
517,764
Plus: Depreciation
362,325
Decrease in C/S
-36,159
141,049
Dividends Paid
-395,521
Increase in Other CL
Less: Increase in A/R
-46,127
227,301
Increase in Inventory
-3,319
Increase in Other CA
3,170*
Decrease in A/P
-26,934
726,387
Investment Activity
Fixed Asset Acquisition
Net Cash from Investments
McGraw-Hill/Irwin
-957,007
-957,007 *Difference due to rounding of dividends
2003 The McGraw-Hill Companies, Inc. All rights
3.9
3.10
Ratio Analysis
Ratios also allow for better comparison
through time or between companies
As we look at each ratio, ask yourself what the
ratio is trying to measure and why is that
information important
Ratios are used both internally and externally
McGraw-Hill/Irwin
3.11
McGraw-Hill/Irwin
3.12
McGraw-Hill/Irwin
3.13
Debt/Equity = TD / TE
(4,931,444 1,761,044) / 1, 761,044 = 1.800
times
3.14
McGraw-Hill/Irwin
3.15
McGraw-Hill/Irwin
3.16
McGraw-Hill/Irwin
3.17
McGraw-Hill/Irwin
3.18
McGraw-Hill/Irwin
3.19
McGraw-Hill/Irwin
3.20
McGraw-Hill/Irwin
3.21
McGraw-Hill/Irwin
3.22
External uses
Creditors
Suppliers
Customers
Stockholders
McGraw-Hill/Irwin
3.23
Benchmarking
Ratios are not very helpful by themselves;
they need to be compared to something
Time-Trend Analysis
Used to see how the firms performance is
changing through time
Internal and external uses
McGraw-Hill/Irwin
3.24
McGraw-Hill/Irwin
3.25
Coverage ratio
Times Interest Earned = 70.6x; Industry = 3.4x
McGraw-Hill/Irwin
3.26
Profitability ratios
Profit margin before taxes = 17.4%; Industry = 3.1%
ROA (profit before taxes / total assets) = 27.6%;
Industry = 5.8%
ROE = (profit before taxes / tangible net worth) =
37.9%; Industry = 17.6%
McGraw-Hill/Irwin
3.27
Potential Problems
There is no underlying theory, so there is no
way to know which ratios are most relevant
Benchmarking is difficult for diversified firms
Globalization and international competition
makes comparison more difficult because of
differences in accounting regulations
Varying accounting procedures, i.e. FIFO vs.
LIFO
Different fiscal years
Extraordinary events
McGraw-Hill/Irwin
3.28
McGraw-Hill/Irwin
3.29
Quick Quiz
What is the Statement of Cash Flows and how do you
determine sources and uses of cash?
How do you standardize balance sheets and income
statements and why is standardization useful?
What are the major categories of ratios and how do
you compute specific ratios within each category?
What are some of the problems associated with
financial statement analysis?
McGraw-Hill/Irwin