1

Further Look At Financial Statements

Objective of financial reporting: provide info useful in making decisions To be useful information must be:

Relevant: do you care? Reliable: can you count on it? Comparable: to my foreign competitors? Consistent: prepared same way last year?

2

Further Look At Financial Statements

Accounting constraints Materiality: does it matter?

Waste basket: asset or expense? Same for every company?

Conservatism: Don’t overstate income or assets

What about liability and expenses?

3

Further Look At Financial Statements

Uses of financial ratios Intracompany comprisons

Ford 2010 sales versus 2009 Intercompany comparisons

Wal-Mart versus Target profit margin Industry comparisons

McDonalds profit margin versus other restaraunts

4

Further Look At Financial Statements

Financial ratios Liquidity: can I pay my bills now?

Short-term creditors Solvency: can I pay my bills in the future?

Long-term creditors Profitability: am I making money?

Stockholders

5

Further Look At Financial Statements

Financial ratios Liquidity:

Current ratio: CA/CL What is current asset? Current liability?

Working capital: CA – CL Quick: (CA – Inv)/CL

Solvency Debt: Debt/Assets Free cash flow: Operating cash flow – capital expenditures – dividends

Profitability: ROA: Net income/Assets ROE: Net income/Stockholders Equity Profit Margin = Net Income / Sales

6

Further Look At Financial Statements

Depreciation Cost of asset / estimated useful life Guess Could property increase in value? Different amount on tax return? Not a cash expense Accumulated depreciation: total Cost – accumulated depreciation = ???