chapter 3 statements and ratios © 2012 pearson prentice hall. all rights reserved. 1-1

Chapter 3 Statements and Ratios

© 2012 Pearson Prentice Hall. All rights reserved. 1-1

© 2012 Pearson Prentice Hall. All rights reserved. 3-2

The Stockholders’ Report

• Generally accepted accounting principles (GAAP) are the practice and procedure guidelines used to prepare and maintain financial records and reports;

• The Sarbanes-Oxley Act of 2002, passed to eliminate the many disclosure and conflict of interest problems of corporations

• More Countries Adopt International Financial Reporting Standards

– International Financial Reporting Standards (IFRS) are established by the International Accounting Standards Board (IASB).

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Focus on Ethics

Take Earnings Reports at Face Value

– Near the end of each quarter, many companies unveil their quarterly performance.

– Firms that beat analyst estimates often see their share prices jump, while those that miss estimates by even a small amount, tend to suffer price declines.

– The practice of manipulating earnings in order to mislead investors is known as earnings management.

• Why might financial managers be tempted to manage earnings?

• Is it unethical for managers to manage earnings if they disclose their activities to investors?

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The Four Key Financial Statements: The Income Statement

• The income statement provides a financial summary of a company’s operating results during a specified period.

• Although they are prepared quarterly for reporting purposes, they are generally computed monthly by management and quarterly for tax purposes.

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Table 3.1 Bartlett Company Income Statements ($000)

Concentrate on control issue•Gross profit – control expenses of production•Operating profit – control of the expenses of “running” the company•Net income – remaining profits after all expenses paid

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The Four Key Financial Statements: The Balance Sheet

• The balance sheet presents a summary of a firm’s financial position at a given point in time.

• The statement balances the firm’s assets (what it owns) against its financing, which can be either debt (what it owes) or equity (what was provided by owners).

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Table 3.2a Bartlett Company Balance Sheets ($000)

Represents the assets that management has purchased and uses to achieve it’s mission and goals.

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Table 3.2b Bartlett Company Balance Sheets ($000)

Represents how management gets the $$ to purchase the assets of the firm.

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The Four Key Financial Statements: Statement of Retained Earnings

The statement of retained earnings reconciles the net income earned during a given year, and any cash dividends paid, with the change in retained earnings between the start and the end of that year.

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The Four Key Financial Statements: Statement of Cash Flows

• The statement of cash flows provides a summary of the firm’s operating, investment, and financing cash flows and reconciles them with changes in its cash and marketable securities during the period.

• This statement not only provides insight into a company’s investment, financing and operating activities, but also ties together the income statement and previous and current balance sheets.

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Table 3.4 Bartlett Company Statement of

Cash Flows ($000) for the Year Ended

December 31, 2012

The cash flow statement illustrates the primary decisions that managers make.•Managers make decisions on how to run the business (operations)•Managers decide what kinds of assets to buy (investment)•Managers decide where to get the $$ to run the business (financing)

Financial Ratio Analysis

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The Balance-Sheet Model of the Firm

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Current Assets

Fixed Assets

1 Tangible

2 Intangible

Total Book Value of Assets:

Shareholders’ Equity

Current Liabilities

Long-Term Debt

Total Firm Value to Investors:

All the “stuff” we have purchased for the firm

Where did the money come from to buy the “stuff”

Using Financial Ratios: Cautions for Doing Ratio Analysis

Ratios must be considered together; a single ratio by itself means relatively little.

Financial statements that are being compared should be dated at the same point in time.

Use audited financial statements when possible.

The financial data being compared should have been developed in the same way.

Be wary of inflation distortions.

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Molson Coors (TAP)

2002 2003 2004 2005 2006

$3,776 $4,000 $4,305 $5,506 $5,844

$2,415 $2,587 $2,741 $3,307 $3,481

$1,361 $1,413 $1,564 $2,199 $2,363

$1,063 $1,106 $1,216 $1,777 $1,782

$298 $307 $348 $422 $581

-$70 -$81 -$72 -$131 -$143

$28 $27 $32 $4 $34

$256 $253 $308 $295 $472

-$94 -$79 -$95 -$50 -$82

$162 $174 $213 $245 $390

Extraordinary $122 -$137 -$77 $21 -$273

Net Income $40 $311 $290 $224 $663

Fully Diluted EPS $4.420 $4.770 $5.190 $1.690 $4.170

Dividends per Share $0.820 $0.820 $0.820 $1.280 $1.280

$56.850 $52.900 $72.220 $65.230 $75.880

Year

Net Sales

Cost of Goods Sold

EBT (Earn Before Taxes)

Taxes (neg)

NI from Recurring Op

Gross Profit

Other Op Expenses

EBIT (Op Income)

Interest Exp (neg)

Stock Price (end of yr)

Interest Income

15 of 34Business Finance/ Income Statement (data)

Molson Coors (TAP)

2002 2003 2004 2005 2006

$59 $19 $123 $39 $182

$704 $656 $832 $828 $828

$184 $209 $234 $314 $319

$106 $194 $79 $287 $129

$1,053 $1,078 $1,268 $1,468 $1,458

$1,380 $1,450 $1,445 $2,305 $2,421

$1,256 $1,348 $1,471 $7,294 $7,363

$608 $568 $473 $732 $361

$4,297 $4,444 $4,657 $11,799 $11,603

$334 354 326 371 419

$813 $779 $850 $1,865 $1,381

$1,147 $1,133 $1,176 $2,236 $1,800

$2,168 $2,044 $1,843 $4,154 $3,939

$3,315 $3,177 $3,019 $6,390 $5,739

$1,086 $1,231 $1,398 $1,422 $1,673

-$104 $36 $240 $3,987 $4,191

$4,297 $4,444 $4,657 $11,799 $11,603

36.566 36.596 37.909 80.036 86.656

Year

Account Receivable

Cash & Mkt Sec.

Inventory

Misc CA

Net Fixed Assets

Total Current Assets

Intangibles

Total Assets

Other Non-Current Assets

Retained Earnings

Total Liabilities and Equity

Outstanding Shares

Common Stock

Accounts Payable

Other CL

Total Current Liabilities

Notes Payable (LT)

Total Debt

LT Debt

16 of 34Business Finance / Balance Sheet (data)

Molson Coors (TAP)

2002 2003 2004 2005 2006

$244 $528 $499 $422 $833

$230 $242 $267 $414 $441

-$1,570 -$214 -$67 -$312 -$294

$1,291 -$357 -$335 -$188 -$401

-$35 -$43 $97 -$78 $138Net Change in Cash

Net Cash from Financing

Net Cash from Investing

Net Cash from Op Activities

Derpreciation

Year

17 of 34Business Finance / Cash Flow Statement (data)

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Malt Beverage Industry

Business Finance / Industry Ratios

2002 2003 2004 2005 2006

1.60 1.20 1.50 1.30 1.40

0.70 0.60 0.90 0.60 0.70

23.00 17.00 21.00 23.00 22.00

32.00 41.00 39.00 42.00 40.00

28.00 29.00 28.00 29.00 31.00

2.20 3.00 1.60 2.40 2.10

1.50 1.40 1.10 1.50 1.40

200.00% 230.00% 180.00% 140.00% 140.00%

56.40% 63.00% 57.40% 57.50% 66.50%

160.00% 210.00% 180.00% 130.00% 160.00%

3.300 1.900 2.200 2.900 3.800

2.29 2.70 2.35 2.35 2.99

38.40% 36.70% 40.30% 37.30% 36.90%

6.20% 4.20% 5.10% 5.60% 7.10%

5.90% 4.80% 3.10% 5.90% 7.40%

9.30% 5.88% 5.61% 8.40% 9.94%

22.40% 18.10% 8.60% 19.50% 24.20%

4.10% 2.60% 3.10% 3.80% 6.00%EBT / Sales

Current Ratio (CR)

Quick Ratio (QR)

Asset Management

Days Sales Outstand DSO

Days Carry Inv DCI

Days Payable Outstand DPO

Liquidity

Year

Fixed Asset Turnover FAT

Total Asset Turnover TAT

Leverage Ratios

LTD / NW (DE)

TD / TA (DR)

FA / NW

Times Int Earned (TIE)

Profitability Ratios

Financial Leverage (FLM)

Gross Profit (GPM)

Operating Profit (OPM)

EBT / TA ("ROA")

BEP

EBT / Tang. NW ("ROE")

Liquidity ratios

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CLCA

CR =CL

INVCAQR

-

Measures the ability of the firm to pay current obligations

Use both if inventory is a large portion of the company’s current assets

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Liquidity Ratios

0.400

0.600

0.800

1.000

1.200

1.400

1.600

1.800

2002 2003 2004 2005 2006

TAP Current ratio

Industry Current Ratio

TAP Quick Ratio

Industry Quick Ratio

Business Finance / Financial Ratios

Asset mgt ratios (Activity)

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365/CGSP/A

DPO =

365/CGSINV

DCI =INVCGS

IT =

365/salesR/A

ACPDSO ==

R/Asales

turnover R/A =

Average number of days inventory on the shelf

Average number of days for customers to pay for their accounts

Average number of days it takes us to pay our accounts

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20.000

25.000

30.000

35.000

40.000

45.000

50.000

2002 2003 2004 2005 2006

TAP Days Carry Inventory

Industry Days Carry Inventory

Business Finance / Financial Ratios

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0.000

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

2002 2003 2004 2005 2006

TAP Days Sales Outstanding

Industry Days Sales Outstanding

Business Finance / Financial Ratios

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0.000

20.000

40.000

60.000

2002 2003 2004 2005 2006

TAP Days Payable Outstanding

Industry Days Payable Outstanding

Business Finance / Financial Ratios

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TAsales

TAT =

assets fixednetsales

FAT =

Asset mgt ratios (Activity, Efficiency)

Measures management’s efficient use of assets

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0.000

0.500

1.000

1.500

2.000

2.500

3.000

3.500

1 2 3 4 5

TAP Fixed Asset Turnover

Industry Fixed Asset Turnover

TAP Total Asset Turnover

Industry Total Asset Trunover

Business Finance / Financial Ratios

Leverage ratios

Degree of indebtedness (how much)– cannot say whether good or bad– Mgt chooses a level of debt– NW = common equity = TA - TL

Ability to pay int

Financial leverage - use of other peoples money to make a higher return

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leverage ratios

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TATD

DR = NWLTD

DE =

INTEBIT

TIE =

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40.000%

45.000%

50.000%

55.000%

60.000%

65.000%

70.000%

75.000%

80.000%

85.000%

90.000%

2002 2003 2004 2005 2006

TAP Debt Ratio

Industry Debt Ratio

Business Finance / Financial Ratios

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0.000

1.000

2.000

3.000

4.000

5.000

6.000

2002 2003 2004 2005 2006

TAP Times Interest Earned

Industry Times Interest Earned Ratio

Business Finance / Financial Ratios

Profitability ratios

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salesOP recurring fromNI

NPM =

salesGP

GPM =

salesEBIT

OPM =

SalesEBT

Sales/EBT =

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0.000%

5.000%

10.000%

15.000%

20.000%

25.000%

30.000%

35.000%

40.000%

45.000%

2002 2003 2004 2005 2006

TAP Gross Profit Margin

Industry GPM

TAP Operating Profit MArgin

Industry OPM

Business Finance / Financial Ratios

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0.000%

2.000%

4.000%

6.000%

8.000%

10.000%

12.000%

2002 2003 2004 2005 2006

TAP Operating Profit MArgin

Industry OPM

TAP EBT / Sales

Industry EBT / Sales

Business Finance / Financial Ratios

Profitability ratios

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shares #common to available NI

EPS =

TAavailable NI

ROA =

TAEBIT

BEP =

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0.000%

5.000%

10.000%

15.000%

20.000%

25.000%

2002 2003 2004 2005 2006

TAP Basic Earning Power

Industry Basic Earning Power

Business Finance / Financial Ratios

Market Based Ratios

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shares #equity pfdTLTA

shares #CE

BPS

BPSprice mkt

book to mkt

EPSprice Mkt

PE

Graph EPS & PE for the presentation

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0.000

5.000

10.000

15.000

20.000

25.000

30.000

35.000

40.000

45.000

2002 2003 2004 2005 2006

TAP PE Ratio

TAP EPS

Business Finance / Financial Ratios

ROE (Dupont analysis)

Owner profitability can be measured by

– profitability

– asset management

– Leverage

• equity multiplier of financial leverage multiplier

• (leverage number)

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CE

TA*

TA

Sales*

SAles

NIFLM*TAT*NPMROE

2002 2003 2004 2005 2006

6.780% 6.325% 7.154% 5.358% 8.077%

0.879 1.111 1.082 2.143 1.985

5.958% 7.027% 7.739% 11.481% 16.036%

4.376 3.507 2.843 2.181 1.979

26.069% 24.647% 22.004% 25.045% 31.730%

2002 2003 2004 2005 2006

5.900% 4.800% 3.100% 5.900% 7.400%

1.500 1.400 1.100 1.500 1.400

8.850% 6.720% 3.410% 8.850% 10.360%

2.294 2.703 2.347 2.353 2.985

20.298% 18.162% 8.005% 20.824% 30.925%

EBT / Sales

TAT

ROA

FLM

Approx EOE

Company

Company

EBT / Sales

TAT

ROA

FLM

Approx EOE

39 of 34Business Finance / DuPont Analysis

Personal Financial Statements

1.Personal Net Worth

2.Cash Mgt and Budgets

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