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Module 4 - Financial Statement Analysis (Part 2) PDF

This document provides an overview of financial ratio analysis and various types of ratios used to evaluate a company's financial position and performance. It discusses ratios to analyze short-term financial position like current ratio and cash ratio. It also covers long-term financial position ratios like debt-to-total assets ratio and asset management ratios like inventory turnover. The document gives examples of calculating ratios and provides learning objectives about using ratios to analyze profitability, liquidity, leverage and efficiency. It concludes with explaining the DuPont analysis method of breaking down return on equity.

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351 views

Module 4 - Financial Statement Analysis (Part 2) PDF

This document provides an overview of financial ratio analysis and various types of ratios used to evaluate a company's financial position and performance. It discusses ratios to analyze short-term financial position like current ratio and cash ratio. It also covers long-term financial position ratios like debt-to-total assets ratio and asset management ratios like inventory turnover. The document gives examples of calculating ratios and provides learning objectives about using ratios to analyze profitability, liquidity, leverage and efficiency. It concludes with explaining the DuPont analysis method of breaking down return on equity.

Uploaded by

emmanvillafuerte
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Module 4

Financial Statement
Analysis
M. MANAYAO, CPA, MBA
Learning Objectives
➢ Analyze a business firm’s short-term financial position, asset
liquidity and management, long-term financial position and
profitability using financial ratios.
Financial Ratio Analysis
There are a number of different ways to analyze
financial statements. The most applied is the financial
ratio. Financial Ratio is a comparison in fraction,
proportion, decimal or percentage of two significant
figures taken from financial statements. It express the
direct relationship between two or more quantities in
the statement of financial position and statement of
comprehensive income of a business firm.
Financial Ratio Analysis
This can be categorized as follows:
1. Liquidity Ratios
2. Asset Management Ratios
3. Debt Management Ratios
4. Profitability Ratios
5. Market Book Ratios
Ratios Used to Evaluate Short-
term Financial Position (Short-
Term Solvency and Liquidity)
Cash Ratio
➢ It measures the number of times that the current
liabilities could be paid using cash and marketable
securities.

Cash + Marketable Securities


Current Liabilities
Ratios Used to Evaluate Asset
Liquidity and Management
Efficiency
Average Age of Trade Payables
➢ Days’ in trade payables.
➢ Itindicates the length of time during which payables
remain unpaid.

Number of Days in a year


Payable Turnover
Cash Conversion Cycle
➢ Itshows the time from when the cash is used in
operations to the time it is converted into cash again.

Operating Cycle – Average


age of trade payables
Ratios Used to Evaluate Long-
term Financial Position or
Stability/Leverage
Ratios Used to Measure
Profitability and Returns to
Investors
The DuPont Disaggregation Analysis
➢ DuPont Equation is the formula that shows that the return on
equity can be found as the product of profit margin, total
assets turnover and the equity multiplier. It shows the
relationships among asset management, financial leverage
management and profitability ratios.

➢ Disaggregation of return on equity (ROE) was initially


introduced by E. I. DuPont de Nemours and Company to help
its managers in performance evaluation.
Problem 17 (page 124)
Requirement a: Current Ratio
Current Ratio = Current Assets / Current Liabilities
Current Ratio = 570,000 / 300,000 = 1.90

Current Assets = 50,000 + 280,000 + 240,000 = 570,000


Current Liabilities = 220,000 + 80,000 = 300,000
Problem 17 (page 124)

Requirement b: Quick Ratio


Quick Ratio = Quick Assets / Current Liabilities
Quick Ratio = 330,000 / 300,000 = 1.10

Quick Assets = 50,000 + 280,000 = 330,000


Problem 17 (page 124)
Requirement c: Debt-to-Total Assets Ratio
Debt to Total Assets Ratio = Total Debt / Total Assets
Debt to Total Assets Ratio = 418,000 / 950,000 = 44%
Total debt = 220,000 + 80,000 + 118,000 = 418,000

Requirement d: Asset Turnover


Asset Turnover = Sales / Total Assets
Asset Turnover = 3,040,000 / 950,000 = 3.20
Problem 17 (page 124)

Requirement e: Average Collection Period


Average Collection Period = 360 days / Receivable Turnover
Average Collection Period = 360 days / 8.1429 = 44.21 days

Receivable Turnover = Net Credit Sales / Average Receivable


Receivable Turnover = (3,040,000 x 75%) / 280,000 = 8.1429 times
Problem 1 (page 116)

Requirement: Accounts receivable balance


DSO = 4o days; Sales = 7,300,000; AR = ?
DSO = Accounts Receivable / (net sales / 365 days)
40 = Accounts Receivable / (7,300,000 / 365 days)
40 = Accounts Receivable / 20,000
Accounts Receivable = 40 x 20,000
Accounts Receivable = 800,000
Problem 13 (page 118)
Requirement: Complete the statement of financial position and
sales information
Total Debt = 300,000 x 50% = 150,000
Accounts Payable = Total Debt – Long-term Debt
Accounts Payable = 150,000 – 60,000 = 90,000

Common Stock = Total liabilities and Equity – Total Debt – RE


Common Stock = 300,000 – 150,000 – 97,500
Common Stock = 52,500
Problem 13 (page 118)

Total Assets Turnover = Net Sales / Ave. Total Assets


1.5 = Net Sales / 300,000
Net Sales = 300,000 x 1.5 = 450,000

Cost of Goods Sold = 450,000 x 75% = 337,500


Problem 13 (page 118)
Inventory Turnover = COGS / Average Inventory
5 = 337,500 / Average Inventory
Average Inventory = 337,500 / 5 = 67,500

Day Sales Outstanding = 365 days / Receivable Turnover


36.5 = 365 / Receivable Turnover
Receivable Turnover = 365 / 36.5 = 10 times
Problem 13 (page 118)
Receivable Turnover = Net Credit Sales / Average Receivable
10 = 450,000 / Average Receivable
Average Receivable = 450,000 / 10 = 45,000

Current Ratio = Current Assets / Current Liabilities


1.8 = Current Assets / 90,000
Current Assets = 1.8 x 90,000 = 162,000
Problem 13 (page 118)

Fixed Assets = Total Assets – Current Assets


Fixed Assets = 300,000 – 162,000 = 138,000

Cash = Current Assets – Accounts receivable – Inventories


Cash = 162,000 – 45,000 – 67,500
Cash = 49,500
Problem 18 (page 124)
Requirement a: Profit Margin
ROA = Profit Margin x Asset Turnover
8.4% = Profit Margin x 1.4
Profit Margin = 8.4% / 1.4 = 6%

Requirement b:
ROA = 7% x 1.2 = 8.4%
Problem 14 (page 119)

Barry Industry
Current Ratio (655,000/330,000) 1.98x 2.0x
Quick Ratio (413,500 / 330,000) 1.25x 1.3x
Days’ Sales Outstanding
(365 days / 4.782)
AR Turnover (1,607,500/336,00) 76.3 days 35 days
Or
336,000 / (1,607,500 / 365 days)
Problem 14 (page 119)
Barry Industry
Inventory Turnover
5.77x 6.7x
(1,392,500 / 241,500)
Total Assets Turnover
1.70x 3.0x
(1,607,500 / 947,500)
Profit margin (27,300/1,607,500) 1.7% 1.2%
ROA (27,300 / 947,500) 2.9% 3.6%
ROE (27,300 / 361,000) 7.6% 9.0%
Total Debt/Total Assets
61.9% 60.0%
(586,500 / 947,500)
Problem 14 (page 119)
Requirement b: DuPont
Barry ROE = PM x ATO x FL
ROE = 1.7% x 1.70 x (947,500 / 361,000)
ROE = 7.6%

ROE = PM x ATO x FL
Industry ROE = 1.2% x 3 x (1 / 0.40)
ROE = 9.0%
Let’s Try This!!!
ABC Company grants credit terms of 1/15, net 30 and
projects gross sales for next year of 2,000,000. The
credit manager estimates that 40% of their customer
pay on the discount rate, 40% on the net due date, and
20% pay 15 days after the net due date.

Required: Assuming uniform sales and a 360-day year,


what is the projected days’ sales outstanding (rounded
to the nearest whole day)?
Let’s Try This!!!
40% x 15 days 6 days
40% x 30 days 12 days
20% x 45 days 9 days
Days’ Sales Outstanding 27 days
➢QUESTIONS????
➢REACTIONS!!!!!
END

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