chapter 15 financial analysis1426

8/15/2019 Chapter 15 Financial Analysis1426

http://slidepdf.com/reader/full/chapter-15-financial-analysis1426 1/88

1

Click to edit Master title style

1

1

1

FinancialStatementAnalysis

15

Revised by Judy Beebe, Western Oregon University



2


2

2

2

Horizontal Analysis

The percentage analysis of

increases and decreases inrelated items in comparative

financial statements is called

horizontal analysis.

15-1



3


3

3

3

Exhibit 1 Comparative Balance Sheets

Assets

Current assets $ 550,000 $ 533,000 $ 17,000 3.2%

Long-term investments 95,000 177,500 (82,500) (!.5%)

"ro#., #ant, an e&ui#. (net) ,500 70,000 (25,500) (5.%)

'ntangie assets 50,000 50,000

ota assets $1,139,500 $1,230,500 $ (91,000)(7.%)

Liaiities

Current iaiities $ 210,000 $ 23,000 $ (33,000) (13.!%)

Long-term iaiities 100,000 200,000 100,000) (50.0%)

ota iaiities $ 310,000 $ 3,000 $(133,000)(30.0%) *to+oers /&uit

"reerre !% sto+, $100 #ar $ 150,000 $ 150,000

Common sto+, $10 #ar 500,000 500,000

etaine earnings 179,500 137,500 $ 2,000 30.5%

ota sto+oers e&uit $ 829,500 $ 787,500 $ 2,000 5.3%

ota ia. 4 sto+oers e&. $1,139,500 $1,230,500 $ (91,000)(7.%)

2008 2007 Amount "er+ent'n+rease (e+rease)

Lin+on Com#an

Com#arative 6aan+e *eete+emer 31, 2008 an 2007

15-1



4


4

4

4

Assets

Current assets $ 550,000 $ 533,000 $ 17,000 3.2%


"ro#., #ant, an e&ui#. (net) ,500 70,000 (25,500) (5.%)


ota assets $1,139,500 $1,230,500 $ (91,000)(7.%)

Liaiities




"reerre !% sto+, $100 #ar $ 150,000 $ 150,000

Common sto+, $10 #ar 500,000 500,000

etaine earnings 179,500 137,500 $ 2,000 30.5%

ota sto+oers e&uit $ 829,500 $ 787,500 $ 2,000 5.3%

ota ia. 4 sto+oers e&. $1,139,500 $1,230,500 $ (91,000)(7.%)

2008 2007 Amount "er+ent

Lin+on Com#an


'n+rease (e+rease)

orionta Anasis

ieren+e $17,000

6ase ear (2007) $533,000: 3.2%

15-1



5


5

5

5

Assets

Current assets $ 550,000 $ 533,000 $ 17,000 3.2%


"ro#., #ant, an e&ui#. (net) ,500 70,000 (25,500) (5.%)


ota assets $1,139,500 $1,230,500 $ (91,000)(7.%)

Liaiities




"reerre !% sto+, $100 #ar $ 150,000 $ 150,000

Common sto+, $10 #ar 500,000 500,000

etaine earnings 179,500 137,500 $ 2,000 30.5%

ota sto+oers e&uit $ 829,500 $ 787,500 $ 2,000 5.3%

ota ia. 4 sto+oers e&. $1,139,500 $1,230,500 $ (91,000)(7.%)

2008 2007 Amount "er+ent

Lin+on Com#an


'n+rease (e+rease)

orionta Anasis

ieren+e $(82,500)

6ase ear (2007) $177,500

: (!.5%)

15-1



6


6

6

6

Comparative Schedule of

Current Assets

Lin+on Com#anCom#arative *+eue o Current Assets

e+emer 31, 2008 an 2007

Increase !ecrease)

Cash " #$%5$$ " 64%&$$ " 25%'$$ 3#.#(

Marketa)le sec*rities &5%$$$ 6$%$$$ 15%$$$ 25.$(

+cco*nts receiva)le net, 115%$$$ 12$%$$$ 5%$$$, 4.2(,

Inventories 264%$$$ 2'3%$$$ 1#%$$$, 6.&(,

-repaid epenses 5%5$$ 5%3$$ 2$$ 3.'(Total c*rrent assets "55$%$$$ "533%$$$ "1&%$$$ 3.2(

2$$' 2$$& +mo*nt -ercent

15-1



&


&

&

&

#

Lin+on Com#anCom#arative *+eue o Current Assets

e+emer 31, 2008 an 2007

Increase !ecrease)

Cash " #$%5$$ " 64%&$$ " 25%'$$ 3#.#(

Marketa)le sec*rities &5%$$$ 6$%$$$ 15%$$$ 25.$(

+cco*nts receiva)le net, 115%$$$ 12$%$$$ 5%$$$, 4.2(,

Inventories 264%$$$ 2'3%$$$ 1#%$$$, 6.&(,

-repaid epenses 5%5$$ 5%3$$ 2$$ 3.'(Total c*rrent assets "55$%$$$ "533%$$$ "1&%$$$ 3.2(


orionta Anasis

ieren+e $25,8006ase ear (2007) $!,700

: 39.9%

15-1



'


'

'

'

Lin+on Com#an

Com#arative 'n+ome *tatement;or te <ear /ne e+emer 31, 2008 an 2007

*aes $1,530,500 $1,23,000 $29!,500 2.0%

*aes returns an ao=an+es 32,500 3,000 (1,500) (.%)

>et saes $1,98,000 $1,200,000 $298,000 2.8%Cost o goos so 1,03,000 820,000 223,000 27.2%

?ross #roit $ 55,000 $ 380,000 $ 75,000 19.7%

*eing e@#enses $ 191,000 $ 17,000 $ ,000 29.9%

Aministrative e@#enses 10,000 97,00 !,!00 !.8%

ota o#erating e@#enses $ 295,000 $ 2,00 $ 50,!00 20.7%

'n+ome rom o#erations $ 1!0,000 $ 135,!00 $ 2,00 18.0%

ter in+ome 8,500 11,000 (2,500) (22.7%)

$ 1!8,500 $ 1!,!00 $ 21,900 1.9%

ter e@#ense (interest) !,000 12,000 (!,000) (50.0%)

'n+ome eore in+ome ta@ $ 1!2,500 $ 13,!00 $ 27,900 20.7%

'n+ome ta@ e@#ense 71,500 58,100 13,00 23.1%

>et in+ome $ 91,000 $ 7!,500 $ 1,500 19.0%


Comparative Income Statement 15-1



#


#

#

#

Lin+on Com#an

Com#arative 'n+ome *tatement;or te <ear /ne e+emer 31, 2008 an 2007

Current assets $1,530,500 $1,23,000 $29!,500 2.0%

*aes returns an ao=an+es 32,500 3,000 (1,500) (.%)

>et saes $1,98,000 $1,200,000 $298,000 2.8%Cost o goos so 1,03,000 820,000 223,000 27.2%

?ross #roit $ 55,000 $ 380,000 $ 75,000 19.7%

*eing e@#enses $ 191,000 $ 17,000 $ ,000 29.9%

Aministrative e@#enses 10,000 97,00 !,!00 !,.8%

ota o#erating e@#enses $ 295,000 $ 2,00 $ 50,!00 20.7%

'n+ome rom o#erations $ 1!0,000 $ 135,!00 $ 2,00 18.0%

ter in+ome 8,500 11,000 (2,500) (22.7%)$ 1!8,500 $ 1!,!00 $ 21,900 1.9%

ter e@#ense (interest) !,000 12,000 (!,000) (50.0%)

'n+ome eore in+ome ta@ $ 1!2,500 $ 13,!00 $ 27,900 20.7%

'n+ome ta@ e@#ense 71,500 58,100 13,00 23.1%

>et in+ome $ 91,000 $ 7!,500 $ 1,500 19.0%


orionta Anasis

'n+rease amount $29!,5006ase ear (2007) $1,23,000

: 2.0%

15-1



1$


1$

1$

1$

Comparative Retained

Earnins Statement

+ percentage analysis that

sho/s the relationship of eachcomponent to the total /ithin

a single statement is called

vertical analysis.

Lin+on Com#anCom#arative etaine /arnings *tatement

e+emer 31, 2008 an 2007

Increase !ecrease)

0etained earnings% an. 1 "13&%5$$ "1$$%$$$ "3&%5$$ 3&.5(

et income for year #1%$$$ &6%5$$ 14%5$$ 1#.$(

Total "22'%5$$ "1&6%5$$ "52%$$$ 2#.5(,

!ividends

n preferred stock " #%$$$ " #%$$$

n common stock 4$%$$$ 3$%$$$ 1$%$$$ 33.3(

Total " 4#%$$$ " 3#%$$$ "1$%$$$ 25.6(

Total c*rrent assets "1&#%5$$ "13&%5$$ "42%$$$ 3$.5(


15-1



11


11

11

11

+ percentage analysis that

sho/s the relationship of each

component to the total /ithina single statement is called

vertical analysis.

Lin+on Com#anCom#arative etaine /arnings *tatement

e+emer 31, 2008 an 2007

Increase !ecrease)

0etained earnings% an. 1 "13&%5$$ "1$$%$$$ "3&%5$$ 3&.5( et income for year #1%$$$ &6%5$$ 14%5$$ 1#.$(

Total "22'%5$$ "1&6%5$$ "52%$$$ 2#.5(,

!ividends

n preferred stock " #%$$$ " #%$$$

n common stock 4$%$$$ 3$%$$$ 1$%$$$ 33.3(Total " 4#%$$$ " 3#%$$$ "1$%$$$ 25.6(

Total c*rrent assets "1&#%5$$ "13&%5$$ "42%$$$ 3$.5(


orionta Anasis

'n+rease amount $37,500

6ase ear (2007) $100,000: 37.5%

15-1



12


12

12

12

Example Exercise 15-1

15-1

The comparative cash and acco*nts receiva)le for a

company are provided )elo/

2$$' 2$$&Cash "62%5$$ "5$%$$$

+cco*nts receiva)le net, &4%4$$ '$%$$$

ased on this information% /hat is the amo*nt and

percentage of increase or decrease that /o*ld )e sho/nin a )alance sheet /ith hori7ontal analysis8



13


13

13

13

9or -ractice -: 15;1+% -: 15;1

Follow My Example 15-1

15-1

Cash "12%5$$ increase "62%5$$ <

"5$%$$$,% or 25(

+cco*nts

0eceiva)le "5%6$$ decrease "&4%4$$ < "'$%$$$,

or <&(



14


14

14

14

!ertical Analysis

+ percentage analysis *sed to

sho/ the relationship of eachcomponent to the total /ithin a

single statement is called

vertical analysis.

15-1



15


15

15

15

In a vertical analysis of the aan+e

seet% each asset item is stated as a

percent of the tota assets. :ach

lia)ility and stockholders= e>*ity item

is stated as a percent of the total

lia)ilities and stockholders= e>*ity.

!ertical Analysis of Balance Sheet 15-1

1616

16



16


16

16

16

Lin+on Com#anCom#arative 6aan+e *eet

;or te <ears /ne e+emer 31, 2008 an 2007

Assets

Current assets $ 550,000 8.3% $ 533,000 3.3%

Long-term investments 95,000 8.3 177,500 1.

"ro#ert, #ant, 4 e&ui#. (net) ,500 39.0 70,000 38.2'ntangie assets 50,000 . 50,000 .1

ota assets $1,139,500 100.0% $1,230,500 100.0%

Liaiities

Current iaiities $ 210,000 18.% $ 23,000 19.7%

Long-term iaiities 100,000 8.8 200,000 1!.3

ota iaiities $ 310,000 27.2% $ 3,000 3!.0%

*to+oers /&uit"reerre !% sto+, $100 #ar $ 150,000 13.2% $ 150,000 12.2%

2.2% Common sto+, $10 #ar 500,000 3.9 500,000 0.!

etaine earnings 179,500 15.7 137,500 11.2

ota sto+oers e&uit $ 829,500 72.8% $ 787,500 !.0%

ota ia. 4 *to+oers e&uit $1,139,500 100.0% $1,230,500 100.0%

Amount "er+ent Amount "er+ent

2008 2007

ota assets $1,139,500 100.0% $1,230,500100.0%

ota ia. 4 sto+oers e&uit $1,139,500 100.0% $1,230,500100.0%

15-1

1&1&

1&



1&


1&

1&

1&

To demonstrate ho/ vertical

analysis percentages are

calc*lated for the )alance sheet%let=s see ho/ the 4'.3 percent

/as calc*lated for the 2$$'

c*rrent assets in the net slide.

15-1

1'1'

1'



1'


1'

1'

1'

Lin+on Com#anCom#arative 6aan+e *eet


Assets

Current assets $ 550,000 8.3% $ 533,000 3.3%

Long-term investments 95,000 8.3 177,500 1.

"ro#ert, #ant, 4 e&ui#. (net) ,500 39.0 70,000 38.2'ntangie assets 50,000 . 50,000 .1

ota assets $1,139,500 100.0% $1,230,500 100.0%

Liaiities

Current iaiities $ 210,000 18.% $ 23,000 19.7%

Long-term iaiities 100,000 8.8 200,000 1!.3

ota iaiities $ 310,000 27.2% $ 3,000 3!.0%

*to+oers /&uit"reerre !% sto+, $100 #ar $ 150,000 13.2% $ 150,000 1

2.2% Common sto+, $10 #ar 500,000 3.9 500,000 0.!

etaine earnings 179,500 15.7 137,500 11.2

ota sto+oers e&uit $ 829,500 72.8% $ 787,500 !.0%

ota ia. 4 *to+oers e&uit $1,139,500 100.0% $1,230,500 100.0%


2008 2007

ota assets $1,139,500 100.0% $1,230,500100.0%

ota ia. 4 sto+oers e&uit $1,139,500 100.0% $1,230,500100.0%

Berti+a Anasis

Current assets $550,000

ota assets $1,139,500: 8.3%

15-1

1#1#

1#



1#


1#

1#

1#

In a vertical analysis of the

in+ome statement% each item is

stated as a percent of net saes.+s an eample% let=s see ho/ the

percent of 12.'( /as calc*lated

for 2$$' selling epenses.

!ertical Analysis of Income Statement 15-1

2$2$

2$



2$


2$

2$

2$

*aes $1,530,500 102.2% $1,23,000 102.8%

*aes returns an ao=. 32,500 2.2 3,000 2.8

>et saes $1,98,000 100.0% $1,200,000 100.0%

Cost o goos so 1,03,000 !9.! 820,000 !8.3

?ross #roit $ 55,000 30.% $ 380,000 31.7%*eing e@#enses $ 191,000 12.8% $ 17,000 12.3%

Aministrative e@#enses 10,000 !.9 97,00 8.1

ota o#erating e@#enses $ 295,000 19.7% $ 2,00 20.%

'n+ome rom o#erations $ 1!0,000 10.7 $ 135,!00 11.3%

ter in+ome 8,500 0.! 11,000 0.9

$ 1!8,500 11.3% $ 1!,!00 12.2%

ter e@#ense (interest) !,000 0. 12,000 1.0'n+ome eore in+ome ta@ $ 1!2,500 10.9% $ 13,!00 11.2%

'n+ome ta@ e@#ense 71,500 .8 58,100 .8

>et in+ome $ 91,000 !.1% $ 7!,500 !.%

2008 2007


Lin+on Com#anCom#arative 'n+ome *tatement


15-1

Comparative Income Statement

2121

21



21


21

21

21

*aes $1,530,500 102.2% $1,23,000 102.8%

*aes returns an ao=. 32,500 2.2 3,000 2.8

>et saes $1,98,000 100.0% $1,200,000 100.0%

Cost o goos so 1,03,000 !9.! 820,000 !8.3

?ross #roit $ 55,000 30.% $ 380,000 31.7%*eing e@#enses $ 191,000 12.8% $ 17,000 12.3%

Aministrative e@#enses 10,000 !.9 97,00 8.1

ota o#erating e@#enses $ 295,000 19.7% $ 2,00 20.%

'n+ome rom o#erations $ 1!0,000 10.7 $ 135,!00 11.3%

ter in+ome 8,500 0.! 11,000 0.9

$ 1!8,500 11.3% $ 1!,!00 12.2%

ter e@#ense (interest) !,000 0. 12,000 1.0'n+ome eore in+ome ta@ $ 1!2,500 10.9% $ 13,!00 11.2%

'n+ome ta@ e@#ense 71,500 .8 58,100 .8

>et in+ome $ 91,000 !.1% $ 7!,500 !.%

2008 2007


Lin+on Com#anCom#arative 'n+ome *tatement


Berti+a Anasis

*eing e@#enses $191,000

>et saes $1,98,000: 12.8%

15-1

2222

22



22


22

22

22

Common"Size Statements

In a common-sized statements% all

items are epressed as a percentage.

Common;si7ed statements are*sef*l in comparing the c*rrent

period /ith prior periods% individ*al

)*sinesses% or one )*siness /ith

/ith ind*stry percentages.

15-1

2323

23



23


23

23

23

Common"Size Income

Statement

15-1

2424

24



24


24

24

24


15-1

Income statement information for ?ee Corporation is

provided )elo/ ?ee Corporation

@ales

"1$$%$$$

Cost of goods sold

65%$$$

Aross profit

" 35%$$$

-repare a vertical analysis of the income statement for?ee Corporation.

2525

25



25


25

25

25

9or -ractice -: 15;2+% -: 15;2


15-1

@ales "1$$%$$$ 1$$( "1$$%$$$B"1$$%$$$,

Cost of goods sold65%$$$ 65"65%$$$B"1$$%$$$,

Aross profit 35%$$$ 35( "35%$$$B"1$$%$$$,

Amount "er+entage

2626

26



26


26

26

26

Solvency Analysis

The a)ility of a )*siness to meet

its financial o)ligations de)ts,

is called solvency.

The a)ility of a )*siness to earn

income is called profitability.

15-

2&2&

2&



2&


2&

2&

2&

Current #osition Analysis

sing meas*res to assess a

)*siness=s a)ility to pay its

c*rrent lia)ilities is calledcurrent position analysis. @*ch

analysis is of special interest to

short;term creditors.

15-

2'2'

2'



2'


2'

2'

2'

$or%in Capital

The ecess of c*rrent assets of a

)*siness over its c*rrent lia)ilities

is called working capital . The/orking capital is often *sed in

eval*ating a company=s a)ility to

meet c*rrently mat*ring de)ts.

15-

2#2#

2#



2#


2#

2#

2#

oring +a#ita (a D ) $30,000

Current asset

Cas $ 90,500

Earetae se+urities 75,000A++ounts re+eivae (net) 115,000

'nventories 2!,000

"re#ai e@#enses 5,500

a. ota +urrent assets $550,000

. Current iaiities 210,000

Lin+on Com#an

15-

3$3$

3$



3$


3$

3$

3$

Current Ratio

The current ratio% sometimes

called the working capital

ratio or bankers’ ratio% iscomp*ted )y dividing the total

c*rrent assets )y the total

c*rrent lia)ilities.

15-

3131

31



31


31

31

31

Current ratio (aF) 2.! 2.2

a. Current assets $550,000 $533,000

. Current iaiities 210,000 23,000

oring +a#ita (a D ) $30,000 $290,000

2008 2007

Lin+on Com#an

15-

3232

32




32

&uic% Ratio

+ ratio that meas*res the

Dinstant= de)t;paying a)ilityof a company is called the

quick ratio or acid-test ratio.

15-

3333

33




33

2008 2007

Gui+ ratio (aF) 1.3 1.0

Gui+ assets

Cas $ 90,500 $ !,700

Earetae se+urities 75,000 !0,000

A++ounts re+eivae (net) 115,000 120,000

a. ota &ui+ assets $280,500 $2,700

. Current iaiities $210,000 $23,000

Lin+on Com#an

Quick assets are cash

and other c*rrent assets

that can )e >*icklyconverted to cash.

Quick assets are cash

and other c*rrent assets

that can )e >*icklyconverted to cash.

15-

3434

34




34


15-

The follo/ing items are reported on a company=s

)alance sheet

Cash

"3$$%$$$

Marketa)le sec*rities

1$$%$$$

+cco*nts receiva)le net,

2$$%$$$

Inventory

!etermine a, the c*rrent ratio and ), the >*ick ratio.

3535

35




359or -ractice -: 15;3+% -: 15;3

Follow My Example 15-3a. C*rrent 0atio E C*rrent +ssetsBC*rrent ?ia)ilities

C*rrent 0atio E "3$$%$$$ F "1$$%$$$ F "2$$%$$$ F

"2$$%$$$,B"4$$%$$$

C*rrent 0atio E2.0

). G*ick 0atio E G*ick +ssets cash% marketa)le sec*rities%

and acco*nts receiva)le,BC*rrent ?ia)ilities

acco*nts paya)le,

G*ick 0atio E "3$$%$$$ F "1$$%$$$ F "2$$%$$$,B"4$$%$$$

G*ick 0atio E 1.5

15-

3636

36




36

Accounts Receivable 'urnover

The relationship )et/een sales and

acco*nts receiva)le may )e stated as

the accounts receivable turnover .The ratio is to assess the efficiency of

the firm in collecting receiva)les and

in the managing of credit.

15-

3&3&

3&




3&

A++ounts re+eivae turnover

(aF) 12.7 9.2

a. >et saes $1,98,000 $1,200,000

A++ounts re+eivae (net)

6eginning o ear $ 120,000 $ 10,000/n o ear 115,500 120,000

ota $ 235,000 $ 2!0,000

. Average (otaF2) $ 117,500

$ 130,000

2008 2007Lin+on Com#an

15-

3'3'

3'




3'

(umber of )ays* Sales in

Receivables

The number of days’ sales in

receivables is an estimate of the length

of time in days, the acco*ntsreceiva)le have )een o*tstanding.

Comparing this meas*re /ith the credit

terms provides information on theefficiency in collecting receiva)les.

15-

3#3#

3#




3#

>umer o as saes in

re+eivaes (aF) 28.! 39.5

a. Average (otaF2) $ 117,500$ 130,000

>et saes $1,98,000 $1,200,000

. Average ai saes on

a++ount (*aesF3!5) $ ,10 $ 3,288

2008 2007

Lin+on Com#an

15-

4$4$

4$




4$


15-

+ company reports the follo/ing

et sales

"#6$%$$$

+verage acco*nts receiva)le net,

4'%$$$

!etermine a, the acco*nts receiva)le t*rnover and ),

the n*m)er of days= sales in receiva)les. 0o*nd to one

decimal place.

4141

41




41

9or -ractice -: 15;4+% -: 15;4


15-

a. +cco*nts 0eceiva)le T*rnover E @alesB+verage acco*nts

receiva)le

+cco*nts 0eceiva)le T*rnover E "#6$%$$$B"4'%$$$

+cco*nts 0eceiva)le T*rnover E 20.0

). *m)er of !ays= @ales in 0eceiva)les E +verage acco*nts

receiva)leB+verage daily sales

*m)er of !ays= @ales in 0eceiva)les E "4'%$$$B

"#6$%$$$B 365,

*m)er of !ays= @ales in 0eceiva)les E "4'%$$$B"2%63$

*m)er of !ays= @ales in 0eceiva)les E 18.3 as

4242

42




42

Inventory 'urnover

The relationship )et/een the

vol*me of goods merchandise,

sold and inventory may )e statedas the inventory turnover . The

p*rpose of this ratio is to assess

the efficiency of the firm in

managing its inventory.

15-

4343

43




43

2008 2007

'nventor turnover (aF) 3.8 2.8

a. Cost o goos so $1,03,000 $ 820,000

'nventories

6eginning o ear $ 283,000 $ 311,000

/n o ear 2!,000 283,000

ota $ 57,000 $ 59,000

. Average (otaF2) $ 273,500

$ 297,000

Lin+on Com#an

15-

4444

44




44

>umer o as saes in inventor (aF) 95.7 132.2

a. Average (otaF2) $ 273,500 $ 297,000

Cost o goos so $1,03,000 $ 820,000

. Average ai +ost o goos

so (C?*F3!5 as) $2,858 $2,27

2008 2007

(umber of )ays* Sales in Inventory

Lin+on Com#an

15-

4545

45




45


15-


Cost of goods sold

"56$%$$$

+verage inventory

112%$$$

!etermine a, the inventory t*rnover and

), the n*m)er of days= sales in inventory.

0o*nd to one decimal place.

4646

46




46

9or -ractice -: 15;5+% -: 15;5


15-

a. Inventory T*rnover E Cost of Aoods @oldB+verageInventory

Inventory T*rnover E "56$%$$$B"112%$$$

Inventory T*rnover E 5.0

). *m)er of !ays= @ales in Inventory E +verage InventoryB+verage !aily Cost of Aoods @old

*m)er of !ays= @ales in Inventory E "112%$$$B

"56$%$$$B365,

*m)er of !ays= @ales in Inventory E "112%$$$B"1%534 *m)er of !ays= @ales in Inventory E 73.0 as

4&4&

4&




4&

Ratio of +ixed Assets to ,on"'erm

,iabilities

The ratio of fixed assets to long-

term liabilities is a solvency meas*re

that indicates the margin of safety ofthe noteholders or )ondholders. It

also indicates the a)ility of the

)*siness to )orro/ additional f*nds

on a long;term )asis.

15-

4'4'

4'




4'

2008 2007

atio o i@e assets to

ong-term iaiities (aF) . 2.

a. ;i@e assets (net) $,500 $70,000

. Long-term iaiities $100,000 $200,000

Lin+on Com#an

15-

4#4#

4#




4#

Ratio of ,iabilities to Stoc%holders*

E-uity

The relationship )et/een the

total claims of the creditors and

o/nersthe ratio of liabilities to

stockholders’ equity is a

solvency meas*re that indicates

the margin of safety for creditors.

15-

5$5$

5$




5$

atio o iaiities to

sto+oers e&uit (aF) 0. 0.!

a. ota iaiities $310,000 $3,000

. ota sto+oers e&uit $829,500 $787,500

2008 2007

Lin+on Com#an

15-

5151

51




51


15-

The follo/ing information /as taken from +cme

Company=s )alance sheet

9ied assets net,

"1%4$$%$$$

?ong;term lia)ilities

4$$%$$$Total lia)ilities

56$%$$$

Total stockholders= e>*ity

!etermine the company=s a, ratio of fied assets to

long;term lia)ilities and ), ratio of lia)ilities tostockholders= e>*ity.

5252

52




52

9or -ractice -: 15;6+% -: 15;6


15-

a. 0atio of 9ied +ssets to ?ong;Term ?ia)ilities E 9ied +ssetsB?ong;

Term ?ia)ilities

0atio of 9ied +ssets to ?ong;Term ?ia)ilities E "1%4$$%$$$B

"4$$%$$$

0atio of 9ied +ssets to ?ong;Term ?ia)ilities E 3.5

). 0atio of ?ia)ilities to Total @tockholders= :>*ity E Total

?ia)ilitiesBTotal @tockholders= :>*ity

0atio of ?ia)ilities to Total @tockholders= :>*ity E "56$%$$$B

"1%4$$%$$$

0atio of ?ia)ilities to Total @tockholders= :>*ity E 0.

5353

53




53

(umber of 'imes Interest Chares

Earned

Corporations in some ind*stries

normally have high ratios of de)t to

stockholders= e>*ity. 9or s*ch

corporations% the relative risk of the

de)tholders is normally meas*red as the

number of times interest charges are

earned d*ring the year,% sometimescalled the fixed charge coverage ratio.

15-

5454

54




54

2008 2007

'n+ome eore in+ome ta@ $1!2,500 $13,!00

a. A interest e@#ense !,000 12,000. Amount avaiae to meet

interest +arges $1!8,500 $1!,!00

Lin+on Com#an

>umer o times interest

+arges earne (Fa) 28.1 12.2

15-

5555

55




55


15-


Income )efore income ta

"25$%$$$

Interest epense

1$$%$$$

!etermine the n*m)er of times interest charges

are earned.

5656

56




56

9or -ractice -: 15;&+% -: 15;&


15-

*m)er of Times Interest Charges are :arned E

Income efore Income Ta F Interest :pense,B

Interest :pense *m)er of Times Interest Charges are :arned E

"25$%$$$ F "1$$%$$$,B"1$$%$$$

*m)er of Times Interest Charges are :arned E 3.5

5&5&

5&




5&

#rofitability Analysis

Profitability is the a)ility of an entity to earn profits.

This a)ility to earn profits depends on the

effectiveness and efficiency of operations as

/ell as reso*rces availa)le as reported in the

)alance sheet.

Profitability analysis foc*ses primarily on

the relationship )et/een operating res*ltsreported in the income statement and

reso*rces reported in the )alance sheet.

15-!

5'5'

5'




5'

Ratio of (et Sales to Assets

The ratio of net sales to assets

is a profita)ility meas*re thatsho/s ho/ effectively a firm

*tili7es its assets.

15-!

5#5#

5#




5#

2008 2007

a. >et saes $1,98,000 $1,200,000

ota assets

6eginning o ear $1,053,000 $1,010,000/n o ear 1,0,500 1,053,000

ota $2,097,500 $2,0!3,000

. Average (otaF2) $1,08,750 $1,031,500

Lin+on Com#an

:cl*des long;term investments:cl*des long;term investments

15-!

6$6$

6$




6$

2008 2007

a. >et saes $1,98,000 $1,200,000

ota assets

6eginning o ear $1,053,000 $1,010,000/n o ear 1,0,500 1,053,000

ota $2,097,500 $2,0!3,000

. Average (otaF2) $1,08,750 $1,031,500

Lin+on Com#an

atio o net saes to assets (aF) 1. 1.2

15-!

6161

61




61


15-!

+ company reports the follo/ing et sales

"2%25$%$$$

+verage total sales

1%5$$%$$$

!etermine the ratio of net sales to assets.


0atio of et @ales to Total +ssets E et @alesB+verage Total

+ssets

0atio of et @ales to Total +ssets E "2%25$%$$$B"1%5$$%$$$

0atio of et @ales to Total +ssets E 1.5

9or -ractice -: 15;'+% -: 15;'

6262

62




62

Rate Earned on 'otal Assets

The rate earned on total

assets meas*res the profita)ility of total assets%

/itho*t considering ho/ the

assets are financed.

15-!

6363

63




63

2008 2007

ate earne on tota

assets (aF) 8.2% 7.3%

>et in+ome $ 91,000 $ 7!,500

"us interest e@#ense !,000 12,000

a. ota $ 97,000 $ 88,500ota assets

6eginning o ear $1,230,500 $1,187,500

/n o ear 1,139,500 1,230,500

ota $2,370,000 $2,18,000

. Average (otaF2) $1,185,000 $1,209,000

Lin+on Com#an

15-!

6464

64

15




64


15-!

+ company reports the follo/ing income statement and

)alance sheet information for the c*rrent year

et income

" 125%$$$

Interest epense

25%$$$+verage total assets

2%$$$%$$$

!etermine the rate earned on total assets.

6565

65

15




65

9or -ractice -: 15;#+% -: 15;#


15-!

0ate :arned on Total +ssets E et Income F Interest

:pense,B+verage Total +ssets

0ate :arned on Total +ssets E "125%$$$ F "25%$$$,B"2%$$$%$$$

0ate :arned on Total +ssets E 7.5%

6666

66




66

Rate Earned on Stoc%holders* E-uity

The rate earned on

stockholders’ equity meas*reemphasi7es the rate of income

earned on the amo*nt invested

)y the stockholders.

15-!

6&6&

6&




6&

ate earne on sto+oerse&uit (aF) 11.3% 10.0%

a. >et in+ome $ 91,000 $ 7!,500

*to+oers e&uit

6eginning o ear $ 787,500 $ 750,000/n o ear 829,500 787,500

ota $1,!17,000 $1,537,500

. Average (otaF2) $ 808,500 $ 7!8,750

2008 2007Lin+on Com#an

15-!

6'6'

6'




6'

The difference in the rate

earned on stockholders= e>*ityand the rate earned on total

assets is called leverage.

,everae 15-!

6#6#

6#




6#

1$(

5(

$(

0ate earned on

total assets

0ate earned on

stockholders= e>*ity

8.2%

11.3%Leverage

3.1%

2008

7.3%

10.0%

Leverage

2.7%

2007

,everae 15-!

&$&$

&$




&$

The rate earned on common

stockholders’ equity foc*sesonly on the rate of profits

earned on the amo*nt invested

)y the common stockholders.

Rate Earned on Common

Stoc%holders* E-uity

15-!

&1&1

&1




&1

2008 2007

>et in+ome $ 91,000 $ 7!,500

Less #reerre iviens 9,000 9,000

a. emainer+ommon sto+ $ 82,000 $ !7,500

Common sto+oers e&uit6eginning o ear $ !37,500 $ !00,000

/n o ear !79,500 !37,500

ota $1,317,000 $1,237,500

. Average (otaF2) $ !58,500 $ !18,750 ate earne on +ommon

sto+oers e&uit (aF) 12.5% 10.9%

Lin+on Com#an15-!

&2&2

&2

15




&2


15-!


et income

" 125%$$$-referred dividends

5%$$$

+verage stockholders= e>*ity

1%$$$%$$$

+verage common stockholders=

e>*ity

!etermine a, the rate earned on stockholders= e>*ity

and ), the rate earned on common stockholders=e>*ity.

&3&3

&3

15




&3

9or -ractice -: 15;1$+% -: 15;1$


15-!

a. 0ate :arned on @tockholders= :>*ity E et IncomeB+verage

@tockholders= :>*ity

0ate :arned on @tockholders= :>*ity E "125%$$$B"1%$$$%$$$

0ate :arned on @tockholders= :>*ity E 12.5%

). 0ate :arned on Common @tockholders= :>*ity E et

Income < -referred !ividends,B+verage Common

@tockholders= :>*ity

0ate :arned on Common @tockholders= :>*ity E

"125%$$$ < "5%$$$,B"'$$%$$$0ate :arned on Common @tockholders= :>*ity E 15%

&4&4

&4




&4

Earnins per Share on Common Stoc%

ne of the profita)ility

meas*res often >*oted )y the

financial press is earning per

share !P"# on common stock .

It is also normally reported in

the income statement in

corporate ann*al reports.

15-!

&5&5

&5




&5

2008 2007

/arnings #er sare on +ommon

sto+ (aF) $1.! $1.35

>et in+ome $ 91,000 $ 7!,500

"reerre iviens 9,000 9,000

a. emainerientiie =it +ommon sto+ $ 82,000 $ !7,500

. *ares o +ommon sto+50,000 50,000

Lin+on Com#an

15-!

&6&6

&6




&6

#rice"Earnins Ratio

+nother profita)ility meas*re

>*oted )y the financial press

is the price-earnings P$!#

ratio on common stock. The

price;earnings ratio is an

indicator of a firm=s f*t*re

earnings prospects.

15-!

&&&&

&&




&&

2008 2007

"ri+e-earnings ratio on

+ommon sto+ 25 20

Earet #ri+e #er sare o

+ommon sto+ $1.00 $27.00

/arnings #er sare on +ommon

sto+ F 1.! F 1.35

Lin+on Com#an

15-!

&'&'

&'

15-




&'


15-!


et income

"25$%$$$

-referred dividends

"15%$$$

@hares of common stock

o*tstanding

2$%$$$Market price per share of

common stock

"35

a. !etermine the company=s earnings per share on

common stock. ). !etermine the company=s price;earnings ratio.

0o*nd to one decimal place.

&#&#

&#

15-




&#


15!

a, :arnings -er @hare of Common @tock E et

Income < -referred !ividends,B@hares of

Common @tock *tstanding:arnings per @hare of Common @tock E

"25$%$$$ < "15%$$$,B2$%$$$

:arnings per @hare of Common @tock E

$11.75

%ontinued#

'$'$

'$

15-




'$

15!

), -rice;:arnings 0atio E Market -rice per @hare of

Common @tockB:arnings per @hare on Common

@tock -rice;:arnings 0atio E "35.$$B"11.&5

-rice;:arnings 0atio E 3.0


9or -ractice -: 15;11+% -: 15;11

%oncluded#

'1'1

'1




'1

)ividends per Share

&ividends per share can )e reported

/ith earnings per share to indicate the

relationship )et/een dividends and

earnings. Comparing these t/o pershare amo*nts indicates the etent to

/hich the corporation is retaining its

earnings for *se in operations.

15-!

'2'2

'2




'2!ividends :arnings

$0.80

$1.!

2008

$0.!0

$1.35

2007

"er

sare

$2.00

$1.50

$1.00

$0.50

$0.00

Lin+on Com#an

)ividends and Earnin per

Share of Common Stoc%

15-!

'3'3

'3




'3

The dividend yield on common

stock is a profita)ility meas*re

that sho/s the rate of ret*rn tocommon stockholders in terms

of cash dividends.

)ividend .ield 15-!

'4'4

'4




'4

2008 2007

ivien ie on

+ommon sto+ 2.0% 2.2%

iviens #er sare o

+ommon sto+ $ 0.80$ 0.!0

Earet #ri+e #er sare o

+ommon sto+ F1.00

F27.00

Lin+on Com#an

15-!

'5'5

'5




'5

Corporate Annual Reports

In addition to the financial statements and

the accompanying notes% corporate ann*al

reports *s*ally incl*de the follo/ing

sections Management !isc*ssion and +nalysis

0eport on ade>*acy of internal control

0eport on fairness of financial statements

15-"

'6'6

'6




'6

The 'anagement &iscussion and (nalysis

'&)(# incl*des an analysis of the res*lts

of operations and disc*sses management=sopinion a)o*t f*t*re performance. It

compares the prior year=s income statement

/ith the c*rrent year=s. It also contains an

analysis of the firm=s financial condition.

/anaement )iscussion and

Analysis

15-"

'&'&

'&




'&

Management is re>*ired )y the @ar)anes;

ley +ct of 2$$2 to provide a report stating

their responsi)ility for esta)lishing andmaintaining internal control. In addition% the

report m*st state management=s concl*sion

concerning the effectiveness of internal

controls over financial reporting.

Report on Ade-uacy of

Internal Control

15-"

''''

''




''

+ll p*)licly held corporations are

re>*ired to have an independent a*dit

eamination, of their financialstatements. The C-+s /ho cond*ct the

a*dit render an opinion on the fairness

of the statements.

Report on +airness of +inancial

Statements

15-"

chapter 15 financial analysis1426

Documents