Kế toán, kiểm toán - Analysis and interpretation of financial statements

Analysis and Interpretation of Financial StatementsFinancial Statement AnalysisThe application of analytical tools and techniques to financial statement data.Allows users to focus on how numbers are related and how they have changed over time Objective of Financial StatementAnalysisExternal users rely on general purpose financial statementsMake predictions about an organization as an aid in making decisionsUsers highlight important trends or changesRisk and ReturnUsers try to balance the risk of an investment with its expected returnGenerally the greater the risk, the higher the returnFinancial statement analysis is one source of information for assessing risk and returnSources of External InformationPublic companies must publish an annual financial reportGovernment reportsSEC 10K, 10QFinancial service informationMoody’s, Dow-JonesFinancial newspapers and periodicalsWall Street JournalFinancial Analysis ToolsHorizontal analysisVertical analysisRatio analysisHorizontal Analysis: Amounts and Percentages of ChangeAmount of change = later year amount - Earlier year amount Percentage change = Amount of change / Earlier year amount Look for significant change Horizontal Analysis: Trend PercentagesSet all amounts in base year at 100%Compute percentages for a number of yearsDivide each statement amount by respective amount in base yearShows degree of increase or decrease in individual statement itemsUsed to explain changes in operating performanceVertical AnalysisShows how each item in a financial statement compares to the total of that statementBalance sheetSet both total assets and total equities at 100%Income statementSet net sales at 100%Vertical AnalysisIdentify significant dollar and percentage changesExplain the changesIdentify whether they are favorable of unfavorableRatio AnalysisShows the relative size of one financial statement component to another.Effective only when used in combination with other ratios, analysis, and informationRatio AnalysisShort-term liquidityLong-term solvencyProfitabilityMarket performanceShort-term ProfitabilityCurrent ratioQuick ratioAccounts receivable turnoverDays’ sales in receivablesInventory turnoverCurrent RatioCommon measure of liquidity Ability to pay debts as they come dueRule of thumb 2:1Consider other factorsCurrent AssetsCurrent LiabilitiesQuick Ratio (Acid Test)More strict measure of short-term liquidityNumerator includes only quick current assetsAssets readily converted to cashCash + Short-term investments + NetCurrent ReceivablesCurrent liabilitiesAccounts Receivable TurnoverHow many times we turn accounts receivable into cash during a periodNet salesAverage net accounts receivableDays’ Sales in ReceivablesHow many days’ sales remain uncollected in accounts receivableNet sales per day =Net sales365 daysAverage net accounts receivableNet sales per dayInventory TurnoverNumber of times the company sells and replaces its inventory during the periodHolding inventory results in financing and storage costsCost of goods soldAverage inventoryLong-term SolvencyDebt ratioTimes Interest EarnedDebt RatioShows amount of total assets creditors provideHigher levels of debt financing means company has a higher risk of not meeting interest and principal paymentsTotal liabilitiesTotal assetsTimes Interest EarnedNumber of times the company earned interest expense with current incomeCreditors want to know the firm’s ability to pay annual interest chargesNet income + Income tax expense + Interest expenseInterest expenseProfitabilityProfit marginTotal asset turnoverReturn on total assetsReturn on owners’ equityEarning per shareProfit MarginPercentage each sales dollar contributes to net incomeNet incomeNet salesTotal Asset TurnoverMeasures the efficiency of the company is using its investment in assets to generate salesNet salesAverage total assetsReturn on Total AssetsMeasures the amount a company earns on each dollar of investment in assetsNet incomeAverage total assetsReturn on Owners’ EquityMeasures the earnings in relation to the owners’ investment in the companyNet income - Preferred dividendsAverage owner’s equityEarnings Per ShareMeasures the net income available to each share of common stockDiscussed in depth in Chapter 14Net income - Preferred dividendsWeighted average number of common shares outstanding during the yearMarket PerformancePrice/Earnings (P/E) ratioDividend yieldPrice/Earning (P/E) RatioNumber of times earnings per share the stock is currently selling for in the marketMarket price per share of common stockEarnings per shareDividend YieldMeasure of dividend-paying performance of a companyInvestors buy stock for two reasonsReceive cash dividendsSell stock at a higher priceDividends per shareMarket price per shareLimitations of Financial Analysis ToolsHistorical nature of accounting informationChanging economic conditionsComparisons with industry averagesSeasonal factorsQuality of reported income