Kế toán, kiểm toán - Chapter 14: Performance measurement

CHAPTER 14:Performance MeasurementLO 1: Explain and apply comparative analysis.LO 2: Calculate and interpret ratios that are used to analyze liquidity.LO 3: Calculate and interpret ratios that are used to analyze solvency.LO 4: Identify and calculate ratios that are used to analyze profitability.LO 5: Understand the limitations of financial analysis.LEARNING OBJECTIVESHorizontal Analysis Also known as trend analysis A technique to determine the change over timeCan be expressed as an amount or percentagePercentage of base-period amountPercentage change for the periodHorizontal Percentage of a Base-Period AmountHorizontal Percentage Change for the PeriodVertical AnalysisAlso known as common size analysisA technique that expresses each item in a financial statement as a percent of a base amount (total assets or net sales)Expressed as a percentageDiscussion QuestionIdentify some situations when a horizontal or vertical percentage cannot be calculated or is not meaningful.Comparative AnalysisThree types of comparisons:Intracompany basis – comparisons within a companyIntercompany basis – comparisons between one or more competitor companiesIndustry averagesRatio Analysis Liquidity Ratios: Measure short-term ability of the company to pay its maturing obligations and to meet unexpected needs for cashSolvency Ratios: Measure the ability of the company to survive over a long period of timeProfitability Ratios: Measure the operating success of a company for a specific period of timeLiquidity RatiosWorking capitalCurrent ratioReceivables turnoverAverage collection periodInventory turnoverDays in inventoryWorking CapitalMeasures short-term debt paying abilityWorking Capital = Current Assets – Current LiabilitiesCurrent Ratio is a better indicatorHigher is betterCurrent RatioMeasures short-term debt paying abilityCurrent Ratio = Current Assets Current LiabilitiesHigher is normally (but not always) better. Be cautious about influences of slow moving inventory and receivables on this ratio.Receivables TurnoverMeasures liquidity of receivablesReceivables Turnover=Net Credit SalesAverage Gross ReceivablesHigher is betterAverage Collection PeriodMeasures number of days receivables are outstandingAverage Collection Period=365 DaysReceivables TurnoverLower is betterInventory Turnover Measures liquidity of inventoryInventoryTurnover=Cost of Goods SoldAverage InventoryHigher is betterDays in InventoryMeasures number of days inventory is on handDays in Inventory=365 DaysInventory TurnoverLower is betterSolvency RatiosDebt to total assetsTimes interest earnedFree cash flowDebt to Total Assets RatioMeasures % of total assets provided by creditorsDebt to Total Assets =Total LiabilitiesTotal AssetsLower is betterTimes Interest EarnedMeasures ability to meet interest payments as they come dueTimes Interest Earned=Net Income + Interest Expense + Income Tax Expense (EBIT)Interest ExpenseHigher is betterFree Cash FlowMeasures cash available for paying dividends or expanding operationsNet Cash Provided (Used) by Operating ActivitiesNet Capital ExpendituresDividends Paid=Free Cash FlowHigher is betterProfitability RatiosGross profit marginProfit marginAsset turnoverReturn on assetsReturn on common shareholders’ equityBasic Earnings per share (EPS)Price-earnings (P-E) ratioPayout ratioDividend yieldRelationship Amongst Profitability MeasuresGross Profit MarginMeasures margin between selling price and cost of goods soldGross Profit Margin=Gross ProfitNet SalesHigher is betterProfit MarginMeasures the percentage of profit generated by each dollar of salesProfit Margin =Net IncomeNet SalesHigher is betterAsset TurnoverMeasures how efficiently assets are used to generate salesAsset Turnover =Net SalesAverage Total AssetsHigher is betterReturn on AssetsMeasures overall profitability of assetsHow much is earned on each dollar invested in assetsReturn on Assets =Net IncomeAverage Total AssetsHigher is betterReturn on Common Shareholders’ EquityMeasures overall profitability of shareholders’ investmentReturn on Common Shareholders’ Equity=Net Income – Preferred DividendsAverage Common Shareholders’ Equity**Common shareholders’ equity = Total shareholders’ equity – Preferred sharesHigher is betterBasic Earnings per Share (EPS)Measures profit earned on each common shareEarnings Per Share=Net Income – Preferred Dividends DeclaredWeighted Average Number of Common SharesNot comparable between companiesPrice-Earnings (P-E) RatioMeasures relationship between market price per share and earnings per sharePrice-Earnings Ratio=Market Price Per Share Basic Earnings Per ShareHigher indicates investors expect favourable profitability in futureLower may indicate that investors believe less profitability in futurePayout RatioMeasures % of profit distributed in the form of cash dividendsPayout Ratio =Cash Dividends DeclaredNet IncomeHigher is better for investors seeking dividend incomeLower is better for investors seeking price appreciationDividend YieldMeasures rate of return earned from dividends during the yearDividend Yield=Dividends Declared per ShareMarket Price per ShareHigher is better for investors seeking dividend incomeLower is better for investors seeking price appreciationDiscussion QuestionWhy are the P-E and dividend yield ratios known as market measures?Limitations of Financial AnalysisCan be impacted byDiversificationAlternative accounting policies and estimatesOther Comprehensive incomeDiscontinued operationsNonrecurring itemsComparing IFRS and ASPECOPYRIGHTCopyright © 2017 John Wiley & Sons Canada, Ltd. 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