Ration Analysis

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					Financial Statement
     Analysis
             Objectives
1. List the basic financial statement
   analytical procedures.
2. Apply financial statement analysis to
   assess the solvency of a business.
3. Apply financial statement analysis to
   assess the profitability of a business.
4. Summarize the uses and limitations of
   analytical measures.
5. Describe the contents of corporate
   annual reports.
   Horizontal Analysis

What is horizontal
   analysis?
Horizontal Analysis
   It’s an analysis of the percentage
  increases and decreases of related
     items in comparative financial
               statements.
                 Lincoln Company
             Comparative Balance Sheet              Balance Sheet
             December 31, 2006 and 2005
                                                         Increase (Decrease)
        Assets                     2006         2005     Amount     Percent
Current assets                  $ 550,000   $ 533,000    $ 17,000      3.2%
Long-term investments              95,000      177,500     (82,500) (46.5%)
Fixed assets (net)                444,500      470,000     (25,500)   (5.4%)
Intangible assets                  50,000       50,000        —
Total assets                   $1,139,500   $1,230,500   $ (91,000)   (7.4%)
     Liabilities
Current liabilities            $ 210,000    $ 243,000    $ (33,000)   (13.6%)
Long-term liabilities            100,000      200,000     (100,000)   (50.0%)
Total liabilities              $ 310,000    $ 443,000    $(133,000)   (30.0%)
  Stockholders’ Equity
Preferred 6% stock, $100 par    $ 150,000   $ 150,000         —
Common stock, $10 par             500,000     500,000         —
Retained earnings                 179,500     137,500      $42,000    30.5%
Total stockholders’ equity      $ 829,500   $ 787,500      $42,000     5.3%
Total liab. & SE               $1,139,500   $1230,500     $(91,000)   (7.4%)
                 Lincoln Company
             Comparative Balance Sheet
             December 31, 2006 and 2005
                                                       Increase (Decrease)
        Assets                     2006       2005    Amount      Percent
Current assets                  $ 550,000 $ 533,000 $ 17,000         3.2%
Long-term investments              95,000    177,500     (82,500) (46.5%)
Fixed assets (net)                444,500    470,000
                               Horizontal Analysis:      (25,500)   (5.4%)
Intangible assets                  50,000     50,000        —
Total assets                      Difference
                               $1,139,500 $1,230,500$17,000
                                                       $ (91,000)   (7.4%)
     Liabilities                                               = 3.2%
                               Base year (2005) $533,000
Current liabilities             $ 210,000   $ 243,000   $ (33,000)   (13.6%)
Long-term liabilities             100,000     200,000    (100,000)   (50.0%)
Total liabilities               $ 310,000   $ 443,000   $(133,000)   (30.0%)
  Stockholders’ Equity
Preferred 6% stock, $100 par    $ 150,000   $ 150,000        —
Common stock, $10 par             500,000     500,000        —
Retained earnings                 179,500     137,500     $42,000    30.5%
Total stockholders’ equity      $ 829,500   $ 787,500     $42,000     5.3%
Total liab. & SE               $1,139,500   $1230,500    $(91,000)   (7.4%)
                    Lincoln Company
                Comparative Balance Sheet
                December 31, 2006 and 2005
                                                         Increase (Decrease)
        Assets                    2006         2005      Amount     Percent
Current assets                 $ 550,000    $ 533,000    $ 17,000      3.2%
Long-term investments             95,000      177,500      (82,500) (46.5%)
Fixed assets (net)               444,500      470,000      (25,500)   (5.4%)
Intangible assets                 50,000       50,000         —
Total assets                  $1,139,500   $1,230,500    $ (91,000)   (7.4%)
                              Horizontal Analysis:
     Liabilities
Current liabilities            $ 210,000
                                Difference $ 243,000 $ (33,000) (13.6%)
                                                 $(82,500)
Long-term liabilities            100,000     200,000   (100,000) (50.0%)
                                                            = (46.5%)
Total liabilities            Base year (2005) $177,500
                               $ 310,000   $ 443,000 $(133,000) (30.0%)
  Stockholders’ Equity
Preferred stock, $100 par      $ 150,000     $ 150,000       —
Common stock, $10 par            500,000       500,000       —
Retained earnings                179,500       137,500    $42,000    30.5%
Total stockholders’ equity     $ 829,500     $ 787,500    $42,000     5.3%
Total liab. & SE              $1,139,500     $1230,500   $(91,000)   (7.4%)
                  Lincoln Company
              Comparative Balance Sheet
                    Okay, go to the next slideIncrease (Decrease)
              December 31, 2006 and 2005

       Assets           and calculate the
                              2006      2005   Amount     Percent
Current assets             $ 550,000
                               change 533,000
                                       for fixed 17,000 3.2%
                   percentage 95,000 $ 177,500 $ (82,500) (46.5%)
Long-term investments
Fixed assets (net)           assets. 470,000 (25,500) (5.4%)
                             444,500
Intangible assets                50,000      50,000        —
Total assets                 $1,139,500 $1,230,500 $ (91,000)     (7.4%)
     Liabilities
Current liabilities          Horizontal Analysis: $ (33,000) (13.6%)
                              $ 210,000   $ 243,000
Long-term liabilities           100,000     200,000    (100,000) (50.0%)
Total liabilities             $Difference $ 443,000 ? $(133,000) (30.0%)
                                310,000
  Stockholders’ Equity                                      = ?
                            Base year (2005)        ?
Preferred 6% stock, $100 par $ 150,000    $ 150,000        —
Common stock, $10 par           500,000     500,000        —
Retained earnings               179,500     137,500     $42,000   30.5%
Total stockholders’ equity    $ 829,500   $ 787,500     $42,000    5.3%
Total liab. & SE             $1,139,500 $1230,500      $(91,000)  (7.4%)
                   Lincoln Company
               Comparative Balance Sheet
               December 31, 2006 and 2005
                                                         Increase (Decrease)
        Assets                     2006         2005     Amount     Percent
Current assets                  $ 550,000    $ 533,000   $ 17,000      3.2%
Long-term investments              95,000      177,500     (82,500) (46.5%)
Fixed assets (net)                444,500      470,000     (25,500)   (5.4%)
Intangible assets                  50,000       50,000        —
Total assets                   $1,139,500   $1,230,500   $ (91,000)   (7.4%)
     Liabilities
Current liabilities            $ 210,000     $ 243,000   $ (33,000)   (13.6%)
Long-term liabilities            100,000       200,000    (100,000)   (50.0%)
Total liabilities              $ 310,000     $ 443,000   $(133,000)   (30.0%)
  Stockholders’ Equity
Preferred 6% stock, $100 par    $ 150,000   $ 150,000         —
Common stock, $10 par             500,000     500,000         —
Retained earnings                 179,500     137,500      $42,000    30.5%
Total stockholders’ equity      $ 829,500   $ 787,500      $42,000     5.3%
Total liab. & SE               $1,139,500   $1230,500     $(91,000)   (7.4%)
                   Lincoln Company
               Comparative Balance Sheet
               December 31, 2006 and 2005
                                                         Increase (Decrease)
        Assets                     2006         2005     Amount     Percent
Current assets                  $ 550,000    $ 533,000   $ 17,000      3.2%
Long-term investments              95,000      177,500     (82,500) (46.5%)
Fixed assets (net)                444,500      470,000     (25,500)   (5.4%)
Intangible assets                  50,000       50,000        —
Total assets                   $1,139,500   $1,230,500   $ (91,000)   (7.4%)
     Liabilities
Current liabilities            $ 210,000     $ 243,000   $ (33,000)
                                                                      (5.4%)
                                                                       (13.6%)
Long-term liabilities            100,000       200,000    (100,000)    (50.0%)
Total liabilities              $ 310,000     $ 443,000   $(133,000)    (30.0%)
  Stockholders’ Equity
Preferred 6% stock, $100 par    $ 150,000   $ 150,000         —
Common stock, $10 par             500,000     500,000         —
Retained earnings                 179,500     137,500      $42,000     30.5%
Total stockholders’ equity      $ 829,500   $ 787,500      $42,000      5.3%
Total liab. & SE               $1,139,500   $1230,500     $(91,000)    (7.4%)
                 Lincoln Company
            Comparative Income Statement         Income Statement
             December 31, 2006 and 2005
                                                      Increase (Decrease)
                               2006         2005      Amount      Percent
Sales                      $1,530,500   $1,234,000     $296,500    24.0%
Sales returns                  32,500       34,000        (1,500)   (4.4%)
Net sales                  $1,498,000   $1,200,000     $298,000    24.8%
Cost of goods sold          1,043,000      820,000       223,000   27.2%
Gross profit                $ 455,000    $ 380,000     $ 75,000    19.7%
Selling expenses            $ 191,000    $ 147,000     $ 44,000    29.9%
Administrative expenses       104,000       97,400         6,600     6.8%
Total operating expenses    $ 295,000    $ 244,400     $ 50,600    20.7%
Operating income            $ 160,000    $ 135,600     $ 24,400    18.0%
Other income                    8,500        11,000       (2,500) (22.7%)
                            $ 168,500    $ 146,600      $ 21,900   14.9%
Other expense                   6,000       12,000        (6,000) (50.0%)
Income before income tax    $ 162,500    $ 134,600      $ 27,900   20.7%
Income tax                     71,500       58,100        13,400   23.1%
Net income                  $ 91,000      $ 76,500      $ 14,500   19.0%
                 Lincoln Company
            Comparative Income Statement
             December 31, 2006 and 2005
                                                     Increase (Decrease)
                                2006         2005    Amount      Percent
Sales                       $1,530,500 $1,234,000     $296,500    24.0%
                                                                  24.0%
Sales returns                   32,500       34,000      (1,500)   (4.4%)
Net sales                   $1,498,000 $1,200,000     $298,000    24.8%
Cost of goods sold           1,043,000      820,000     223,000   27.2%
Gross profit                 $ 455,000   $ 380,000    $ 75,000    19.7%
                         Horizontal Analysis:
Selling expenses             $ 191,000   $ 147,000    $ 44,000    29.9%
Administrative expenses        104,000
                         Increase amount 97,400$296,500 6,600 6.8% Total
operating expenses           $ 295,000   $ 244,400       = 24.0%20.7%
                                                      $ 50,600
Operating income             $ year (2005) $1,234,000
                         Base 160,000 $ 135,600 $ 24,400 18.0%
Other income                     8,500        11,000     (2,500) (22.7%)
                             $ 168,500   $ 146,600     $ 21,900   14.9%
Other expense                    6,000       12,000      (6,000) (50.0%)
Income before income tax     $ 162,500   $ 134,600     $ 27,900   20.7%
Income tax                      71,500       58,100      13,400   23.1%
Net income                   $ 91,000     $ 76,500     $ 14,500   19.0%
                  Lincoln Company
             Comparative Income Statement
              December 31, 2006 and 2005
                                                     Increase (Decrease)
                                2006         2005    Amount      Percent
Sales                       $1,530,500 $1,234,000     $296,500     24.0%
Sales returns                   32,500       34,000      (1,500)   (4.4%)
Net sales                   $1,498,000 $1,200,000     $298,000     24.8%
Cost of goods sold           1,043,000      820,000     223,000    27.2%
Gross profit                 $ 455,000   $ 380,000    $ 75,000     19.7%
Selling expenses             $ 191,000   $ 147,000    $ 44,000     29.9%
Administrative expenses        104,000       97,400       6,600 6.8% Total
operating expenses           $ 295,000   $ 244,400
                         Horizontal Analysis:         $ 50,600     20.7%
Operating income             $ 160,000   $ 135,600    $ 24,400     18.0%
Other income                     8,500
                         Increase amount 11,000$298,000 (2,500) (22.7%)
                             $ 168,500   $ 146,600       = 24.8%14.9%
                                                       $ 21,900
Other expense            Base year (2005) $1,200,000 (6,000) (50.0%)
                                 6,000       12,000
Income before income tax     $ 162,500   $ 134,600     $ 27,900    20.7%
Income tax                      71,500       58,100      13,400    23.1%
Net income                   $ 91,000     $ 76,500     $ 14,500    19.0%
Vertical Analysis
  A percentage analysis can be
 used to show the relationship of
    each component to a total
    within a single statement.
Vertical Analysis

  The total, or 100% item,
   on the balance sheet is
       “total assets.”
                        Lincoln Company                  Balance
                     Comparative Balance Sheet
                              December 31, 2006            Sheet
                                                       December 31, 2005
                             Amount Percent            Amount      Percent
       Assets
Current assets                   $ 550,000    48.3%    $ 533,000    43.3%
Long-term investments               95,000     8.3       177,500    14.4
Property, plant, & equip. (net)    444,500    39.0       470,000    38.2
Intangible assets                   50,000     4.4        50,000     4.1
  Total assets                  $1,139,500   100.0%   $1,230,500   100.0%
     Liabilities
Current liabilities              $ 210,000   18.4%     $ 243,000    19.7%
Long-term liabilities              100,000    8.8        200,000    16.3
    Vertical Analysis:
  Total liabilities              $ 310,000   27.2%     $ 443,000    36.0%
 Stockholders’ Equity
    Current assets        $550,000
Preferred stock, 6%, $100 par $ 150,000 =    13.2%
                                             48.3%     $ 150,000    12.2%
    Total assets
Common stock, $10 par $1,139,500   500,000    43.9       500,000    40.6
Retained earnings                  179,500    15.7       137,500    11.2
  Total stockholders’ equity     $ 829,500    72.8%    $ 787,500    64.0%
  Total liab. & SE              $1,139,500   100.0%   $1,230,500   100.0%
                       Lincoln Company
                    Comparative Balance Sheet
                             December 31, 2006       December 31, 2005
                            Amount Percent           Amount Percent
       Assets
Current assets                   $ 550,000  48.3%                  43.3%
                                                      $ 533,000 43.3%
Long-term investments               95,000   8.3        177,500    14.4
Property, plant, & equip. (net)    444,500  39.0        470,000    38.2
Intangible assets                   50,000   4.4         50,000     4.1
  Total assets                  $1,139,500 100.0%    $1,230,500 100.0%
     Liabilities
Current liabilities              $ 210,000  18.4%     $ 243,000    19.7%
Long-term liabilities              100,000   8.8        200,000    16.3
  Total liabilities       Vertical Analysis:
                                 $ 310,000  27.2%     $ 443,000    36.0%
 Stockholders’ Equity
                           Current assets     $533,000
Preferred 6% stock, $100 par $ 150,000      13.2%                  12.2%
                                                      $ 150,000 43.3%
                                                             =
Common stock, $10 par Total assets 500,000   $1,230,500500,000
                                            43.9                   40.6
Retained earnings                  179,500  15.7        137,500    11.2
  Total stockholders’ equity     $ 829,500  72.8%     $ 787,500    64.0%
  Total liab. & SE              $1,139,500 100.0%    $1,230,500 100.0%
                         Lincoln Company
                      Comparative Balance Sheet
                               December 31, 2006         December 31, 2005
                              Amount Percent             Amount Percent
       Assets
Current assets                     $ 550,000    48.3%    $ 533,000    43.3%
Long-term investments                 95,000     8.3       177,500    14.4
Property, plant, & equip. (net)      444,500    39.0       470,000    38.2
Intangible assets                     50,000     4.4        50,000     4.1
  Total assets                    $1,139,500   100.0%   $1,230,500   100.0%
     Liabilities
Current liabilities               $ 210,000    18.4%     $ 243,000   19.7%
Long-term liabilities               100,000     8.8        200,000   16.3
  Total liabilities               $ 310,000    27.2%     $ 443,000   36.0%
 Stockholders’ Equity
Preferred 6% stock, $100 par       $ 150,000    13.2%    $ 150,000    12.2%
Common stock, $10 par                500,000    43.9       500,000    40.6
Retained earnings                    179,500    15.7       137,500    11.2
  Total stockholders’ equity       $ 829,500    72.8%    $ 787,500    64.0%
  Total liab. & SE                $1,139,500   100.0%   $1,230,500   100.0%
                           Lincoln Company                Income
                     Comparative Income Statement
                                                         Statement
            For the Years Ended December 31, 2006 and 2005
                                     2006                  2005
                               Amount Percent      Amount Percent
Sales                        $1,530,500    102.2% $1,234,000 102.8%
Sales returns                    32,500      2.2      34,000    2.8
Net sales                    $1,498,000    100.0% $1,200,000 100.0%
Cost of goods sold            1,043,000     69.6     820,000 68.3
Gross profit                  $ 455,000     30.4% $ 380,000 31.7%
Selling expenses                            12.8%
                              $ 191,000 Net sales $ 147,000 12.3%
Administrative expenses         104,000      6.9      97,400    8.1
Total operating expenses      $ 295,000 is 100.0% $ 244,400 20.4%
                                            19.7%
Income from operations        $ 160,000     10.7   $ 135,600   11.3%
Other income                      8,500      0.6      11,000    0.9
                              $ 168,500     11.3% $ 146,600 12.2%
Other expense                     6,000      0.4      12,000    1.0
Income before income tax      $ 162,500     10.9% $ 134,600    11.2%
Income tax expense               71,500      4.8      58,100    4.8
Net income                    $ 91,000       6.1% $ 76,500      6.4%
                            Lincoln Company
                     Comparative Income Statement
            For the Years Ended December 31, 2006 and 2005
                                      2006                 2005
                                Amount Percent     Amount Percent
Sales                         $1,530,500   102.2% $1,234,000 102.8%
Sales returns                     32,500     2.2      34,000    2.8
Net sales                     $1,498,000   100.0% $1,200,000 100.0%
Cost of goods sold             1,043,000    69.6     820,000 68.3
Gross profit                   $ 455,000    30.4% $ 380,000 31.7%
Selling expenses               $ 191,000    12.8% $ 147,000 12.3%
Administrative expenses          104,000     6.9      97,400    8.1
Total operating expenses       $ 295,000    19.7% $ 244,400 20.4%
Income from operations         $ 160,000    10.7   $ 135,600   11.3%
Other income                       8,500     0.6      11,000    0.9
     Vertical Analysis:        $ 168,500    11.3% $ 146,600 12.2%
Other expense                      6,000     0.4      12,000    1.0
     Selling expenses $191,000
Income before income tax               = 10.9% $ 134,600 11.2%
                               $ 162,500 12.8%
     Net sales
Income tax expense       $1,498,000
                                  71,500     4.8      58,100    4.8
Net income                     $ 91,000      6.1% $ 76,500      6.4%
                           Lincoln Company
                     Comparative Income Statement
            For the Years Ended December 31, 2006 and 2005
                                     2006                 2005
                               Amount Percent     Amount Percent
Sales                        $1,530,500   102.2% $1,234,000 102.8%
Sales returns                    32,500     2.2      34,000    2.8
Net sales                    $1,498,000   100.0% $1,200,000 100.0%
Cost of goods sold            1,043,000    69.6     820,000 68.3
Gross profit                  $ 455,000    30.4% $ 380,000 31.7%
Selling expenses              $ 191,000    12.8% $ 147,000 12.3%
Administrative expenses         104,000     6.9      97,400    8.1
Total operating expenses      $ 295,000    19.7% $ 244,400 20.4%
Income from operations        $ 160,000    10.7   $ 135,600   11.3%
Other income                      8,500     0.6      11,000    0.9
                              $ 168,500    11.3% $ 146,600 12.2%
Other expense                     6,000     0.4      12,000    1.0
Income before income tax      $ 162,500    10.9% $ 134,600    11.2%
Income tax expense               71,500     4.8      58,100    4.8
Net income                    $ 91,000      6.1% $ 76,500      6.4%
                           Lincoln Company
                     Comparative Income Statement
            For the Years Ended December 31, 2006 and 2005
                                     2006                 2005
                               Amount Percent     Amount Percent
Sales                        $1,530,500   102.2% $1,234,000 102.8%
Sales returns                    32,500     2.2      34,000    2.8
Net sales                    $1,498,000   100.0% $1,200,000 100.0%
Cost of goods sold            1,043,000    69.6     820,000 68.3
Gross profit                  $ 455,000    30.4% $ 380,000 31.7%
Selling expenses              $ 191,000    12.8% $ 147,000 12.3%
Administrative expenses         104,000     6.9      97,400    8.1
Total operating expenses      $ 295,000    19.7% $ 244,400 20.4%
Income from operations        $ 160,000    10.7   $ 135,600   11.3%
Other income                      8,500     0.6      11,000    0.9
                              $ 168,500    11.3% $ 146,600 12.2%
Other expense                     6,000     0.4      12,000    1.0
Income before income tax      $ 162,500    10.9% $ 134,600    11.2%
Income tax expense               71,500     4.8      58,100    4.8
Net income                    $ 91,000      6.1% $ 76,500      6.4%
                           Lincoln Company
                     Comparative Income Statement
            For the Years Ended December 31, 2006 and 2005
                                     2006                 2005
                               Amount Percent     Amount Percent
Sales                        $1,530,500   102.2% $1,234,000 102.8%
Sales returns                    32,500     2.2      34,000    2.8
Net sales                    $1,498,000   100.0% $1,200,000 100.0%
Cost of goods sold            1,043,000    69.6     820,000 68.3
Gross profit                  $ 455,000    30.4% $ 380,000 31.7%
Selling expenses              $ 191,000    12.8% $ 147,000 12.3%
Administrative expenses         104,000     6.9      97,400    8.1
Total operating expenses      $ 295,000    19.7% $ 244,400 20.4%
Income from operations        $ 160,000    10.7   $ 135,600   11.3%
Other income                      8,500     0.6      11,000    0.9
                              $ 168,500    11.3% $ 146,600 12.2%
Other expense                     6,000     0.4      12,000    1.0
Income before income tax      $ 162,500    10.9% $ 134,600    11.2%
Income tax expense               71,500     4.8      58,100    4.8
Net income                    $ 91,000      6.1% $ 76,500      6.4%
Common Size Statements
    Vertical analysis with both dollar and
     percentage amounts is also useful in
   comparing one company with another or
        with industry averages. Such
   comparisons are easier to make with the
      use of common-size statements in
       which all items are expressed in
                 percentages.
Common-Size Income Statement
        Solvency Analysis
 Solvency is the ability of a business to meet
  its financial obligations (debts) as they are
  due.
 Solvency analysis focuses on the ability of
  a business to pay or otherwise satisfy its
  current and noncurrent liabilities.
 This ability is normally assessed by
  examining balance sheet relationships.
       Current Position Analysis
Working Capital and Current Ratio
                        2006              2005
Current assets        $550,000          $533,000
Current liabilities    210,000           243,000
Working capital       $340,000          $290,000
Current ratio               2.6               2.2

 Use: To indicate the ability to meet
                              Divide
      currently maturing obligations.
                              current
                                  assets by
                                   current
                                  liabilities
     Current Position Analysis
Quick Ratio
                                  2006        2005
Quick assets:
  Cash                          $ 90,500     $ 64,700
  Marketable securities           75,000       60,000
  Accounts receivable (net)      115,000     120,000
    Total                      $280,500     $244,700
Current liabilities            $210,000     $243,000
Quick ratio                           1.3          1.0

 Use: To indicate instant debt-paying ability.
    Accounts Receivable Analysis
Accounts Receivable Turnover
                                 2006         2005
Net sales on account         $1,498,000   $1,200,000
Accounts receivable (net):
  Beginning of year           $ 120,000   $ 140,000
  End of year                   115,500      120,000
  Total                       $ 235,000    $ 260,000
  Average (Total ÷ 2)         $ 117,500    $ 130,000

                Net sales on account
                 Average accounts
                     receivable
   Accounts Receivable Analysis
Accounts Receivable Turnover
                                   2006         2005
Net sales on account           $1,498,000   $1,200,000
Accounts receivable (net):
  Beginning of year             $ 120,000   $ 140,000
  End of year                     115,500      120,000
  Total                         $ 235,000    $ 260,000
  Average                       $ 117,500    $ 130,000
Accounts receivable turnover         12.7           9.2

 Use: To assess the efficiency in collecting
      receivables and in the management of credit.
    Accounts Receivable Analysis
Number of Days’ Sales in Receivables
                                  2006           2005
Accounts receivable (net),
  end of year                $ 115,000    $ 120,000
Net sales on account         $1,498,000   $1,200,000
Average daily sales on
  account (sales ÷ 365)       $   4,104      $    3,288


          Accounts receivable, end of year
           Average daily sales on account
    Accounts Receivable Analysis
Number of Days’ Sales in Receivables
                                 2006         2005
Accounts receivable (net),
  end of year                $ 115,000    $ 120,000
Net sales on account         $1,498,000   $1,200,000
Average daily sales on
  account (sales ÷ 365)      $   4,104    $    3,288
Number of days’ sales in
receivables                       28.0         36.5

Use: To assess the efficiency in collecting
     receivables and in the management of credit.
            Inventory Analysis
Inventory Turnover
                            2006        2005
Cost of goods sold      $1,043,000   $ 820,000
Inventories:
  Beginning of year      $ 283,000   $ 311,000
  End of year              264,000     283,000
  Total                  $ 547,000   $ 594,000
  Average (Total ÷ 2)    $ 273,500   $ 297,000

                        Cost of goods sold
 Inventory turnover =
                        Average inventory
            Inventory Analysis
Inventory Turnover
                            2006         2005
Cost of goods sold      $1,043,000    $ 820,000
Inventories:
  Beginning of year      $ 283,000    $ 311,000
  End of year              264,000      283,000
  Total                  $ 547,000    $ 594,000
  Average (Total ÷ 2)    $ 273,500    $ 297,000
Inventory turnover              3.8          2.8

 Use: To assess the efficiency in the
      management of inventory.
             Inventory Analysis
Number of Days’ Sales in Inventory
                                   2006        2005
Inventories, end of year       $ 264,000     $283,000
Cost of goods sold             $1,043,000    $820,000
Average daily cost of
  goods sold
  (COGS ÷ 365)                  $   2,858    $ 2,247

 Number of                 Inventories, end of year
Days’ Sales =
in Inventory       Average daily cost of goods sold
             Inventory Analysis
Number of Days’ Sales in Inventory
                               2006       2005
Inventories, end of year   $ 264,000    $283,000
Cost of goods sold         $1,043,000   $820,000
Average daily cost of
  goods sold
  (COGS ÷ 365)              $   2,858   $ 2,247
Number of days’ sales
  in inventory                   92.4      125.9

  Use: To assess the efficiency in the
       management of inventory.
           Long-Term Creditors
Ratio of Fixed Assets to Long-Term Liabilities
                                2006         2005
Fixed assets (net)            $444,500     $470,000
Long-term liabilities         $100,000     $200,000
Ratio of fixed assets to
  long-term liabilities             4.4          2.4

 Use: To indicate the margin of safety
      to long-term creditors.
          Long-Term Creditors
Ratio of Liabilities to Stockholders’ Equity
                               2006       2005
Total liabilities            $310,000   $443,000
Total stockholders’ equity   $829,500   $787,500
Ratio of liabilities to
  stockholders’ equity           0.37       0.56


Use: To indicate the margin of safety to
     creditors.
          Long-Term Creditors
Number of Times Interest Charges Earned
                                   2006       2005
Income before income tax        $ 900,000 $ 800,000
Add interest expense               300,000    250,000
Amount available for interest   $1,200,000 $1,050,000

  Number of                  Income before
Times Interest =       income tax + interest expense
Charges Earned              Interest expense
          Long-Term Creditors
Number of Times Interest Charges Earned
                                   2006       2005
Income before income tax        $ 900,000 $ 800,000
Add interest expense               300,000    250,000
Amount available for interest   $1,200,000 $1,050,000
Number of times earned                4.0         4.2

 Use: To assess the risk to debtholders in
      terms of number of times interest
      charges were earned.
      Profitability Analysis
 Profitability is the ability of an entity to
  earn profits.
 This ability to earn profits depends on the
  effectiveness and efficiency of operations
  as well as resources available.
 Profitability analysis focuses primarily on
  the relationship between operating results
  reported in the income statement and
  resources reported in the balance sheet.
      The Common Stockholder
Ratio of Net Sales to Assets
                              2006         2005
Net sales                  $1,498,000   $1,200,000
Total assets:
  Beginning of year        $1,053,000   $1,010,000
  End of year               1,044,500    1,053,000
  Total                    $2,097,500   $2,063,000
  Average (Total ÷ 2)      $1,048,750   $1,031,500

            Excludes long-term investments
       The Common Stockholder
Ratio of Net Sales to Assets
                                  2006         2005
Net sales                      $1,498,000   $1,200,000
Total assets:
  Beginning of year            $1,053,000   $1,010,000
  End of year                   1,044,500    1,053,000
  Total                        $2,097,500   $2,063,000
  Average (Total ÷ 2)          $1,048,750   $1,031,500
Ratio of net sales to assets       1.4          1.2

 Use: To assess the effectiveness of
      the use of assets.
      The Common Stockholder
Rate Earned on Total Assets
                                 2006        2005
Net income                     $ 91,000     $ 76,500
Plus interest expense              6,000      12,000
  Total                        $ 97,000     $ 88,500
Total assets:
  Beginning of year           $1,230,500   $1,187,500
  End of year                  1,139,500    1,230,500
  Total                       $2,370,000   $2,418,000
  Average (Total ÷ 2)         $1,185,000   $1,209,000
Rate earned on total assets       8.2%        7.3%

Use: To assess the profitability of the assets.
      The Common Stockholder
Rate Earned on Stockholders’ Equity
                                  2006        2005
Net income                      $ 91,000     $ 76,500
Stockholders’ equity:
  Beginning of year             $ 787,500    $ 750,000
  End of year                     829,500      787,500
  Total                        $1,617,000   $1,537,500
  Average (Total ÷ 2)           $ 808,500    $ 768,750
Rate earned on stockholders’
equity                            11.3%        10.0%

 Use: To assess the profitability of the
      investment by stockholders.
                Leverage
             11.3%
                                       10.0%
10%                  Leverage
                                               Leverage
                      3.1%
      8.2%                                      2.7%
                                7.3%
5%



0%
         2006                      2005

             Rate earned           Rate earned on
             on total              stockholders’
             assets                equity
      The Common Stockholder
Rate Earned on Common Stockholders’ Equity
                                   2006         2005
Net income                     $   91,000   $   76,500
Less preferred dividends            9,000        9,000
Remainder—common stock         $   82,000   $   67,500
Common stockholders’ equity:
  Beginning of year            $ 637,500    $ 600,000
  End of year                     679,500      637,500
  Total                        $1,317,000   $1,237,500
  Average (Total ÷ 2)          $ 658,500    $ 618,750
      The Common Stockholder
Rate Earned on Common Stockholders’ Equity
                                   2006         2005
Net income                     $   91,000   $   76,500
Less preferred dividends            9,000        9,000
Remainder—common stock         $   82,000   $   67,500
Common stockholders’ equity:
   Beginning of year           $ 637,500    $ 600,000
   End of year                    679,500      637,500
   Total                       $1,317,000   $1,237,500
   Average (Total ÷ 2)         $ 658,500    $ 618,750
Rate earned on common
stockholders’ equity               12.5%        10.9%
 Use: To assess the profitability of the
      investment by common stockholders.
      The Common Stockholder
Earnings Per Share on Common Stock
                                       2006       2005
Net income                           $ 91,000   $ 76,500
Less preferred dividends                9,000      9,000
Remainder—common stock               $ 82,000   $ 67,500
Shares of common stock                 50,000     50,000
Earnings per share on common stock     $1.64      $1.35


 Use: To assess the profitability of the
      investment by common stockholders.
      The Common Stockholder
Price-Earnings Ratio
                                      2006     2005
Market price per share of common     $41.00   $27.00
Earnings per share on common         ÷ 1.64   ÷ 1.35
Price-earnings ratio on common stock   25        20

 Use: To indicate future earnings
      prospects, based on the relationship
      between market value of common
      stock and earnings.
Dividends and Earnings Per Share
         $2.00
                           $1.64
  Per    $1.50                               $1.35
 share
         $1.00   $0.80
                                     $0.60
         $0.50

         $0.00
                     2006                2005


                         Dividends     Earnings
      The Common Stockholder

Dividend Yield on Common Stock
                                    2006      2005
Dividends per share of common      $ 0.80    $ 0.60
Market price per share of common   ÷ 41.00   ÷ 27.00
Dividend yield on common stock      1.95%     2.22%

Use: To indicate the rate of return to common
     stockholders in terms of dividends.
        Corporate Annual Reports
In addition to financial statements, the annual
report includes a management discussion analysis
(MDA) and an independent auditors’ report.
 The MDA includes an analysis of the results of
    operations and discusses management’s
     opinion about future performance. It
  compares the prior year’s income statement
   with the current year’s. It also contains an
   analysis of the firm’s financial condition.
       Corporate Annual Reports
In addition to financial statements, the annual
report includes a management discussion analysis
(MDA) and an independent auditors’ report.
       Before issuing annual statements, all
      publicly held corporations are required
       to have an independent audit of their
       financial statements. The CPAs who
      conduct the audit render an opinion as
          to the fairness of the statements.
The End

				
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