Professional Documents
Culture Documents
Statements
MAF605
2.1.1 : Understanding Basic Financial Statement
› Operating
› Investing
› Financing activities
2.1.7 : Cash Flows From Operating Activities
› The net income is taken from Kenanga income statement figure
1.15. To derive at the net income, various items are deducted from
sales, including some that are no cash expenses. Deprecation is
usually the largest of the conch’s items. Because these items are not
cash flows, they must be added back to determine cash flow.
Dividends are not subtracted from operating activities. Instead they
are a discretionary part of financing activities. The other items
represent changes in several working capital accounts, which are
part of operating activities. Decrease (increase) in assets (liability)
account are positive cash flows (inflow). The opposites are negatives
cash flows (outflows). One short-term liability, note payable, is
considered a financing activity and is not included in operating
activities.
The day’s sale outstanding shows approximately how many days on average it takes to
collect the company’s account receivable. The day’s sale outstanding is also called the
average collection period.
2.2.4 : Leverage Ratios
2.2.5 : Coverage Ratios
2.2.6 : Profitability Ratios
2.2.7 : Market Value Ratios Measures
2.3.1 : The Dupont Analysis
Using the DuPont equation above allows management to see more
clearly what derives the return on equity and the interrelationships among
the net profit margin, the asset turnover, and the debt ratios.
Management is provided with a road map to follow in determine their
effectiveness in managing the firm’s resources to maximum the return
earned on the owner’s investment’s. In addition, the manager or owner
can determine why that particular retying egad earned.
2.3.2 : Limitations with Financial Statement and
Ratios Analysis
› The financial ratio have been proved and be used as a tool to evaluate company’s
financial positions, but anyone who works with these ratios ought to be aware of the
some limitation involved in their valuation. The following list includes of the more
important pitfalls that may be encountered in computing and interpreting financial
ratios.
› The different industry sometimes difficult to identify category to which a firm belongs,
especially when firm engages in various lines of business.
› The information of average industry are only approximation and are not scientifically
determined the ratios of all representative sample of the firms within the industry
› The different of accounting standard lead to different result of the ratio analysis.
› An industry may not provide a desirable target Ratios or norm of specific lines of
business. Generally, the information provides only as a guide to the financial positions
of the average firm in the industry.
› The different timing of fiscal year makes it difficult to compare the financial ratio,
especially for the firm that experience seasonality in their operation.
2.4.1 : Choosing Financial Ratios
› 2.4.2 : Discriminant Analysis and Credit Scoring
› It is important to know that financial ratios could be used as a
tool to assess the condition of a company. By using discriminant
analysis, you are able to predict significant events of the
company. The event such as probability of the company
bankruptcy and financial distress is possible by using the
discriminate statistical analysis. Discriminant analysis will
classify the company into one or more groups and produce the
classification results.
› Disriminat analysis model are also used for evaluaioting
commercial loan, consumer loans, and credit card applications.
Such models are often called credit scoring models. The basic
idea of credit scoring is to detect likelihood of default customer.
2.4.3 : Cross-Sectional Analysis
› Cross sectional analysis evaluates a company’s financial
ratio against industry average or average for a selected set
of comparable companies. The industry averages are
broken down into size of company and total sales. The
arrangement of the percentile such as the 25th percentile
belong to the smallest size, 50th to the medium size and
>75th to the larger size. Using this kind of information, a
company can compare itself to other companies of similar
size in the same industry.
2.4.4 : Time Series Analysis
› Changes in a company’s position such as liquidity, financial
leverage, asset turnover, or profitability ratios overt time
can be very meaningful. The changing trends in financial
ratios and companies information are resulting from
general economic condition, industry, specific managerial
decision, or simply something happen good or bad.
Therefore, time series over the period such 10 year period
of profitability ratio of a company could benefit the user in
making an investment decision.
› 1. Inflation and book values
› Chapter 1 emphasized accounting statement are historical
without taking into consideration several factors such inflation
that can distort the information recorded in the balance sheet.
Inflation can also distort a company’s reported earning through
the inventory method of the company. For example, LIFO (last
in first out) convention to overcome the earning, that will distort
its balance sheet by understating the inventory value.
› 2. International accounting
› Accounting standard are substantially different across
countries. As such, language and foreign currency conversion
also differences and need considerable effort to learn and
understand how those financial statements are different from
other countries.
› 3. Judgment, experience, and luck
› Making a right decision is not easy in a complex and dynamic
economic environment. Most decision involve some sorts of
trade-offs, frequently including the principle of high risk, high
return trade off. For example, a company can lower it shrikes by
using less debt, but that too will reduce the stockholders’
expectation return that require judgment and analysis.
›
› 4. The use of financial statement analysis
› There are two reasons why we should use financial statement
analysis. Firstly, it provides a structure for understanding the
dynamic of a company. The questions of how would some
event affect a company, whether the event significant or
insignificant could easily understand the importance of the new
information through understanding financial statement analysis.