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1 of 52Visit UMT online at www.umtweb.edu© South-Western 2004Survey of Accounting, 2/e Chapter 9, ACCT125
ACCOUNTING ACCOUNTING FUNDAMENTALS FOR FUNDAMENTALS FOR
MANAGERSMANAGERS
University of Management and Technology1901 North Fort Myer Drive
Arlington, VA 22209Voice: (703) 516-0035 Fax: (703) 516-0985
Website: www.umtweb.edu
Visit UMT online at www.umtweb.edu 2 of 52Chapter 9, ACCT125
Task Force Clip Art Task Force Clip Art included in this electronic included in this electronic presentation is used with presentation is used with
the permission of New the permission of New Vision Technology of Vision Technology of
Nepean Ontario, Canada.Nepean Ontario, Canada.
3 of 52Visit UMT online at www.umtweb.edu© South-Western 2004Survey of Accounting, 2/e Chapter 9, ACCT125
Chapter 9Chapter 9
Financial Statement AnalysisFinancial Statement Analysis
Visit UMT online at www.umtweb.edu 4 of 52Chapter 9, ACCT125
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
Learning ObjectivesLearning Objectives
1. Describe 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.
Visit UMT online at www.umtweb.edu 5 of 52Chapter 9, ACCT125
1Describe basic financial statement analytical procedures.
Learning ObjectiveLearning Objective
Visit UMT online at www.umtweb.edu 6 of 52Chapter 9, ACCT125
Lincoln CompanyLincoln CompanyComparative Balance SheetComparative Balance SheetDecember 31, 2004 and 2003December 31, 2004 and 2003
AssetsCurrent 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 —
$1,139,500 $1,230,500 $ (91,000) (7.4%) LiabilitiesCurrent liabilities $ 210,000 $ 243,000 $ (33,000) (13.6%)Long-term liabilities 100,000 200,000 (100,000) (50.0%)
$ 310,000 $ 443,000 $(133,000) (30.0%) Stockholders’ EquityPreferred 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%
$ 829,500 $ 787,500 $42,000 5.3% $1,139,500 $1230,500 $(91,000) (7.4%)
Increase (Decrease)2004 2003 Amount Percent
Visit UMT online at www.umtweb.edu 7 of 52Chapter 9, ACCT125
Lincoln CompanyLincoln CompanyComparative Balance SheetComparative Balance SheetDecember 31, 2004 and 2003December 31, 2004 and 2003
AssetsCurrent 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 —
$1,139,500 $1,230,500 $ (91,000) (7.4%) LiabilitiesCurrent liabilities $ 210,000 $ 243,000 $ (33,000) (13.6%)Long-term liabilities 100,000 200,000 (100,000) (50.0%)
$ 310,000 $ 443,000 $(133,000) (30.0%) Stockholders’ EquityPreferred 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%
$ 829,500 $ 787,500 $42,000 5.3% $1,139,500 $1230,500 $(91,000) (7.4%)
Increase (Decrease)2004 2003 Amount Percent
Horizontal Analysis: Horizontal Analysis:
Current year (2004) $550,000Base year (2003) $533,000
= 103.2%
Increase amount $17,000Base year (2003) $533,000
= 3.2%
Visit UMT online at www.umtweb.edu 8 of 52Chapter 9, ACCT125
Lincoln CompanyLincoln CompanyComparative Income StatementComparative Income StatementDecember 31, 2004 and 2003December 31, 2004 and 2003
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%
Increase (Decrease)2004 2003 Amount Percent
Visit UMT online at www.umtweb.edu 9 of 52Chapter 9, ACCT125
Lincoln CompanyLincoln CompanyComparative Income StatementComparative Income StatementDecember 31, 2004 and 2003December 31, 2004 and 2003
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%
Increase (Decrease)2004 2003 Amount Percent
Horizontal Analysis: Horizontal Analysis:
Current year (2004) $1,498,000Base year (2003) $1,200,000
= 124.8%
Increase amount $298,000Base year (2003) $1,200,000
= 24.8%
Visit UMT online at www.umtweb.edu 10 of 52Chapter 9, ACCT125
Lincoln CompanyLincoln CompanyComparative Balance SheetsComparative Balance Sheets
AssetsCurrent assets $ 550,000 48.3% $ 533,000 43.3%Long-term investments 95,000 8.3 177,500 14.4Fixed assets (net) 444,500 39.0 470,000 38.2Intangible assets 50,000 4.4 50,000 4.1
$1,139,500 100.0% $1,230,500 100.0% LiabilitiesCurrent liabilities $ 210,000 18.4% $ 243,000 19.7%Long-term liabilities 100,000 8.8 200,000 16.3
$ 310,000 27.2% $ 443,000 36.0% Stockholders’ EquityPreferred stock, $100 par $ 150,000 13.2% $ 150,000 12.2% Common stock, $10 par 500,000 43.9 500,000 40.6Retained earnings 179,500 15.7 137,500 11.2
$ 829,500 72.8% $ 787,500 64.0% $1,139,500 100.0% $1230,500 100.0%
December 31, 2004 December 31, 2003 Amount Percent Amount Percent
Visit UMT online at www.umtweb.edu 11 of 52Chapter 9, ACCT125
Lincoln CompanyLincoln CompanyComparative Balance SheetsComparative Balance Sheets
AssetsCurrent assets $ 550,000 48.3% $ 533,000 43.3%Long-term investments 95,000 8.3 177,500 14.4Fixed assets (net) 444,500 39.0 470,000 38.2Intangible assets 50,000 4.4 50,000 4.1
$1,139,500 100.0% $1,230,500 100.0% LiabilitiesCurrent liabilities $ 210,000 18.4% $ 243,000 19.7%Long-term liabilities 100,000 8.8 200,000 16.3
$310,000 27.2% $ 443,000 36.0% Stockholders’ EquityPreferred stock, $100 par $ 150,000 13.2% $ 150,000 12.2% Common stock, $10 par 500,000 43.9 500,000 40.6Retained earnings 179,500 15.7 137,500 11.2
$829,500 72.8% $787,500 64.0% $1,139,500 100.0% $1230,500 100.0%
December 31, 2004 December 31, 2003 Amount Percent Amount Percent
Vertical Analysis: Vertical Analysis:
Current liabilities $210,000Total assets $1,139,500
= 18.4%
Visit UMT online at www.umtweb.edu 12 of 52Chapter 9, ACCT125
Lincoln CompanyLincoln CompanyComparative Balance SheetsComparative Balance Sheets
AssetsCurrent assets $ 550,000 48.3% $ 533,000 43.3%Long-term investments 95,000 8.3 177,500 14.4Fixed assets (net) 444,500 39.0 470,000 38.2Intangible assets 50,000 4.4 50,000 4.1
$1,139,500 100.0% $1,230,500 100.0% LiabilitiesCurrent liabilities $ 210,000 18.4% $ 243,000 19.7%Long-term liabilities 100,000 8.8 200,000 16.3
$310,000 27.2% $ 443,000 36.0% Stockholders’ EquityPreferred stock, $100 par $ 150,000 13.2% $ 150,000 12.2% Common stock, $10 par 500,000 43.9 500,000 40.6Retained earnings 179,500 15.7 137,500 11.2
$829,500 72.8% $787,500 64.0% $1,139,500 100.0% $1230,500 100.0%
December 31, 2004 December 31, 2003 Amount Percent Amount PercentCommon-Size StatementsCommon-Size Statements
Visit UMT online at www.umtweb.edu 13 of 52Chapter 9, ACCT125
2Apply financial statement analysis to assess the solvency of a business.
Learning ObjectiveLearning Objective
Visit UMT online at www.umtweb.edu 14 of 52Chapter 9, ACCT125
Solvency AnalysisSolvency 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.
Visit UMT online at www.umtweb.edu 15 of 52Chapter 9, ACCT125
Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Current assets $550,000 $533,000Current liabilities 210,000 243,000
Working Capital and Current RatioWorking Capital and Current RatioWorking Capital and Current RatioWorking Capital and Current Ratio
2004 2003
Visit UMT online at www.umtweb.edu 16 of 52Chapter 9, ACCT125
Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Working Capital and Current RatioWorking Capital and Current RatioWorking Capital and Current RatioWorking Capital and Current Ratio
Use: To indicate the ability to meet currently maturing obligations.
Use: To indicate the ability to meet currently maturing obligations.
2004 2003Current assets $550,000 $533,000Current liabilities 210,000 243,000Working capitalWorking capital $340,000$340,000 $290,000$290,000
Visit UMT online at www.umtweb.edu 17 of 52Chapter 9, ACCT125
Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Current assets $550,000 $533,000Current liabilities 210,000 243,000Working capital $340,000 $290,000
Current ratioCurrent ratio 2.6 2.6 2.2 2.2
Working Capital and Current RatioWorking Capital and Current RatioWorking Capital and Current RatioWorking Capital and Current Ratio
Use: To indicate the ability to meet currently maturing obligations.
Use: To indicate the ability to meet currently maturing obligations.
Divide current
assets by current
liabilities
Divide current
assets by current
liabilities
2004 2003
Visit UMT online at www.umtweb.edu 18 of 52Chapter 9, ACCT125
Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Quick assets:Cash $ 90,500 $ 64,700Marketable securities 75,000 60,000Accounts receivable (net) 115,000 120,000 Total $280,500 $244,700
Current liabilities $210,000 $243,000
Acid-Test RatioAcid-Test RatioAcid-Test RatioAcid-Test Ratio
2004 2003
Visit UMT online at www.umtweb.edu 19 of 52Chapter 9, ACCT125
Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Acid-Test RatioAcid-Test RatioAcid-Test RatioAcid-Test Ratio
Use: To indicate instant debt-paying ability.Use: To indicate instant debt-paying ability.
2004 2003Quick assets:
Cash $ 90,500 $ 64,700Marketable securities 75,000 60,000Accounts receivable (net) 115,000 120,000 Total $280,500 $244,700
Current liabilities $210,000 $243,000Acid-test ratioAcid-test ratio 1.3 1.3 1.0 1.0
Visit UMT online at www.umtweb.edu 20 of 52Chapter 9, ACCT125
Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Accounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable Turnover
Net sales on account $1,498,000 $1,200,000Accounts receivable (net):
Beginning of year $ 120,000 $ 140,000End of year 115,000 120,000Total $ 235,000 $ 260,000
Average $ 117,500 $ 130,000
2004 2003
Visit UMT online at www.umtweb.edu 21 of 52Chapter 9, ACCT125
Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Accounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable TurnoverAccounts Receivable Turnover
Use: To assess the efficiency in collecting receivables and in the management of credit.
Use: To assess the efficiency in collecting receivables and in the management of credit.
Net sales on account $1,498,000 $1,200,000Accounts receivable (net):
Beginning of year $ 120,000 $ 140,000End of year 115,500 120,000Total $ 235,000 $ 260,000
Average $ 117,500 $ 130,000
Accts. receivable turnoverAccts. receivable turnover 12.7 12.7 9.2 9.2
2004 2003
Visit UMT online at www.umtweb.edu 22 of 52Chapter 9, ACCT125
Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Number of Days’ Sales in ReceivablesNumber of Days’ Sales in ReceivablesNumber of Days’ Sales in ReceivablesNumber of Days’ Sales in Receivables
Use: To assess the efficiency in collecting receivables and in the management of credit.
Use: To assess the efficiency in collecting receivables and in the management of credit.
2004 2003Accounts receivable (net)
end of year $ 115,000 $ 120,000Net sales on account $1,498,000 $1,200,000Average daily sales on
on account (sales 365) $ 4,104 $ 3,288
Number of days’ sales in Number of days’ sales in
receivablesreceivables 28 28 36.5 36.5
Visit UMT online at www.umtweb.edu 23 of 52Chapter 9, ACCT125
Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Inventory TurnoverInventory TurnoverInventory TurnoverInventory Turnover
2004 2003Cost of goods sold $1,043,000 $ 820,000Inventories:
Beginning of year $ 283,000 $ 311,000End of year 264,000 283,000Total $ 547,000 $ 594,000
Average $ 273,500 $ 297,000
Visit UMT online at www.umtweb.edu 24 of 52Chapter 9, ACCT125
Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Inventory TurnoverInventory TurnoverInventory TurnoverInventory Turnover
Use: To assess the efficiency in the management of inventory.
Use: To assess the efficiency in the management of inventory.
2004 2003Cost of goods sold $1,043,000 $ 820,000Inventories:
Beginning of year $ 283,000 $ 311,000End of year 264,000 283,000Total $ 547,000 $ 594,000
Average $ 273,500 $ 297,000
Inventory turnoverInventory turnover 3.8 3.8 2.8 2.8
Visit UMT online at www.umtweb.edu 25 of 52Chapter 9, ACCT125
Solvency Measures — The Short-Term CreditorSolvency Measures — The Short-Term Creditor
Number of Days’ Sales in InventoryNumber of Days’ Sales in InventoryNumber of Days’ Sales in InventoryNumber of Days’ Sales in Inventory
Use: To assess the efficiency in the management of inventory.
Use: To assess the efficiency in the management of inventory.
2004 2003Inventories, end of year $ 264,000 $283,000Cost of goods sold $1,043,000 $820,000Average daily cost of
goods sold (COGS 365) $ 2,858 $ 2,247
Number of days’ sales Number of days’ sales
in inventoryin inventory 92.4 92.4 125.9 125.9
Visit UMT online at www.umtweb.edu 26 of 52Chapter 9, ACCT125
Solvency Measures — The Long-Term CreditorSolvency Measures — The Long-Term Creditor
Ratio of Plant Assets to Long-Term LiabilitiesRatio of Plant Assets to Long-Term LiabilitiesRatio of Plant Assets to Long-Term LiabilitiesRatio of Plant Assets to Long-Term Liabilities
Fixed assets (net) $444,500 $470,000Long-term liabilities $100,000 $200,000
2004 2003
Visit UMT online at www.umtweb.edu 27 of 52Chapter 9, ACCT125
Solvency Measures — The Long-Term CreditorSolvency Measures — The Long-Term Creditor
Use: To indicate the margin of safety to long-term creditors.
Use: To indicate the margin of safety to long-term creditors.
2004 2003
Fixed assets (net) $444,500 $470,000Long-term liabilities $100,000 $200,000
Ratio of fixed assets toRatio of fixed assets to
long-term liabilitieslong-term liabilities 4.4 4.4 2.4 2.4
Ratio of Fixed Assets to Long-Term LiabilitiesRatio of Fixed Assets to Long-Term LiabilitiesRatio of Fixed Assets to Long-Term LiabilitiesRatio of Fixed Assets to Long-Term Liabilities
Visit UMT online at www.umtweb.edu 28 of 52Chapter 9, ACCT125
Solvency Measures — The Long-Term CreditorSolvency Measures — The Long-Term Creditor
Ratio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ Equity
2004 2003
Total liabilities $310,000 $443,000Total stockholders’ equity $829,500 $787,500
Visit UMT online at www.umtweb.edu 29 of 52Chapter 9, ACCT125
Solvency Measures — The Long-Term CreditorSolvency Measures — The Long-Term Creditor
Ratio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ EquityRatio of Liabilities to Stockholders’ Equity
Use: To indicate the margin of safety to creditors.Use: To indicate the margin of safety to creditors.
2004 2003
Total liabilities $310,000 $443,000Total stockholders’ equity $829,500 $787,500Ratio of liabilities toRatio of liabilities to
stockholders’ equitystockholders’ equity 0.37 0.37 0.56 0.56
Visit UMT online at www.umtweb.edu 30 of 52Chapter 9, ACCT125
Solvency Measures — The Long-Term CreditorSolvency Measures — The Long-Term Creditor
Number of Times Interest Charges EarnedNumber of Times Interest Charges EarnedNumber of Times Interest Charges EarnedNumber of Times Interest Charges Earned
2004 2003
Income before income tax $ 900,000 $ 800,000Add interest expense 300,000 250,000Amount available for interest $1,200,000 $1,050,000
Visit UMT online at www.umtweb.edu 31 of 52Chapter 9, ACCT125
Solvency Measures — The Long-Term CreditorSolvency Measures — The Long-Term Creditor
Number of Times Interest Charges EarnedNumber of Times Interest Charges EarnedNumber of Times Interest Charges EarnedNumber of Times Interest Charges Earned
Use: To assess the risk to debtholders in terms of number of times interest charges were earned.
Use: To assess the risk to debtholders in terms of number of times interest charges were earned.
2004 2003
Income before income tax $ 900,000 $ 800,000Add interest expense 300,000 250,000Amount available for interest $1,200,000 $1,050,000
Number of times earnedNumber of times earned 4.0 4.0 4.2 4.2
Visit UMT online at www.umtweb.edu 32 of 52Chapter 9, ACCT125
3Apply financial
statement analysis to
assess the profitability
of a business.
Learning ObjectiveLearning Objective
Visit UMT online at www.umtweb.edu 33 of 52Chapter 9, ACCT125
Profitability AnalysisProfitability 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.
Visit UMT online at www.umtweb.edu 34 of 52Chapter 9, ACCT125
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Ratio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to Assets
2004 2003Net sales $1,498,000 $1,200,000Total assets:
Beginning of year $1,053,000 $1,010,000End of year 1,044,500 1,053,000Total $2,097,500 $2,063,000
Average $1,048,750 $1,031,500 Excludes long-term investmentsExcludes long-term investments
Visit UMT online at www.umtweb.edu 35 of 52Chapter 9, ACCT125
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Ratio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to Assets
Use: To assess the effectiveness of the use of assets.
Use: To assess the effectiveness of the use of assets.
2004 2003Net sales on account $1,498,000 $1,200,000Total assets:
Beginning of year $1,053,000 $1,010,000End of year 1,044,500 1,053,000Total $2,097,500 $2,063,000
Average $1,048,750 $1,031,500
Ratio of net sales to assetsRatio of net sales to assets 1.4 1.4 1.2 1.2
Visit UMT online at www.umtweb.edu 36 of 52Chapter 9, ACCT125
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Rate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total Assets
2004 2003Net income $ 91,000 $ 76,500Plus interest expense 6,000 12,000
Total $ 97,000 $ 88,500Total assets:
Beginning of year $1,230,500 $1,187,500End of year 1,139,500 1,230,500Total $2,370,000 $2,418,000Average $1,185,000 $1,209,000
Visit UMT online at www.umtweb.edu 37 of 52Chapter 9, ACCT125
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Rate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total AssetsRate Earned on Total Assets
Use: To assess the profitability of the assets.Use: To assess the profitability of the assets.
2004 2003Net income $ 91,000 $ 76,500Plus interest expense 6,000 12,000
Total $ 97,000 $ 88,500Total assets:
Beginning of year $1,230,500 $1,187,500End of year 1,139,500 1,230,500Total $2,370,000 $2,418,000Average $1,185,000 $1,209,000
Rate earned on total assetsRate earned on total assets 8.2% 8.2% 7.3% 7.3%
Visit UMT online at www.umtweb.edu 38 of 52Chapter 9, ACCT125
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Rate Earned on Stockholders’ EquityRate Earned on Stockholders’ EquityRate Earned on Stockholders’ EquityRate Earned on Stockholders’ Equity
2004 2003Net income $ 91,000 $ 76,500Stockholders’ equity:
Beginning of year $ 787,500 $ 750,000End of year 829,500 787,500Total $1,617,000 $1,537,500Average $ 808,500 $ 768,750
Visit UMT online at www.umtweb.edu 39 of 52Chapter 9, ACCT125
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Rate Earned on Stockholders’ EquityRate Earned on Stockholders’ EquityRate Earned on Stockholders’ EquityRate Earned on Stockholders’ Equity
Use: To assess the profitability of the investment by stockholders.
Use: To assess the profitability of the investment by stockholders.
Net income $ 91,000 $ 76,500Stockholders’ equity:
Beginning of year $ 787,500 $ 750,000End of year 829,500 787,500Total $1,617,000 $1,537,500Average $ 808,500 $ 768,750
Rate earned on equityRate earned on equity 11.3% 11.3% 10.0% 10.0%
2004 2003
Visit UMT online at www.umtweb.edu 40 of 52Chapter 9, ACCT125
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Rate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ Equity
2004 2003Net income $ 91,000 $ 76,500Less preferred dividends 9,000 9,000Remainder—common stock $ 82,000 $ 67,500Common stockholders’ equity:
Beginning of year $ 637,500 $ 600,000End of year 679,500 637,500Total $1,317,000 $1,237,500Average $ 658,500 $ 618,750
Visit UMT online at www.umtweb.edu 41 of 52Chapter 9, ACCT125
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Rate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ EquityRate Earned on Common Stockholders’ Equity
Use: To assess the profitability of the investment by common stockholders.
Use: To assess the profitability of the investment by common stockholders.
2004 2003Net income $ 91,000 $ 76,500Less preferred dividends 9,000 9,000Remainder—common stock $ 82,000$ 82,000 $ 67,500$ 67,500Common stockholders’ equity:
Beginning of year $ 637,500 $ 600,000End of year 679,500 637,500Total $1,317,000 $1,237,500Average $ 658,500$ 658,500 $ 618,750$ 618,750
Rate earned on common equityRate earned on common equity 12.5% 12.5% 10.9% 10.9%
Visit UMT online at www.umtweb.edu 42 of 52Chapter 9, ACCT125
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Earnings Per Share on Common StockEarnings Per Share on Common StockEarnings Per Share on Common StockEarnings Per Share on Common Stock
2004 2003Net income $ 91,000 $ 76,500Less preferred dividends 9,000 9,000Remainder—common stock $ 82,000 $ 67,500Shares of common stock 50,000 50,000
Visit UMT online at www.umtweb.edu 43 of 52Chapter 9, ACCT125
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Earnings Per Share on Common StockEarnings Per Share on Common StockEarnings Per Share on Common StockEarnings Per Share on Common Stock
2004 2003Net income $ 91,000 $ 76,500Less preferred dividends 9,000 9,000Remainder—common stock $ 82,000 $ 67,500Shares of common stock 50,000 50,000
Earnings per share on commonEarnings per share on common $1.64 $1.64 $1.35 $1.35
Use: To assess the profitability of the investment by common stockholders.
Use: To assess the profitability of the investment by common stockholders.
Visit UMT online at www.umtweb.edu 44 of 52Chapter 9, ACCT125
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Price-Earnings RatioPrice-Earnings RatioPrice-Earnings RatioPrice-Earnings Ratio
2004 2003Market price per share of common $20.50 $13.50Earnings per share on common $ 1.64 $ 1.35
Visit UMT online at www.umtweb.edu 45 of 52Chapter 9, ACCT125
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Price-Earnings RatioPrice-Earnings RatioPrice-Earnings RatioPrice-Earnings Ratio
Use: To indicate future earnings prospects, based on the relationship between market value of common stock and earnings.
Use: To indicate future earnings prospects, based on the relationship between market value of common stock and earnings.
2004 2003Market price per share of common $20.50 $13.50Earnings per share on common $ 1.64 $ 1.35
Price-earnings ratio on commonPrice-earnings ratio on common 12.5 12.5 10.0 10.0
Visit UMT online at www.umtweb.edu 46 of 52Chapter 9, ACCT125
Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Dividend YieldDividend YieldDividend YieldDividend Yield
2004 2003Dividends per share of common $ 0.80 $ 0.60Market price per share of common $20.50 $13.50
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4Summarize the uses
and limitations of
analytical measures.
Learning ObjectiveLearning Objective
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Solvency measuresSolvency measuresSolvency measuresSolvency measures
Working Capital
Current ratio
Acid-test ratio
Accounts receivable turnover
Number of days’ sales in receivables
Inventory turnover
Number of days’ sales in inventory
Ratio of fixed assets to long-term liabilities
Ratio of liabilities to stockholders’ equity
Number of times interest charges earned
Summary of Analytical MeasuresSummary of Analytical Measures
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Profitability measuresProfitability measuresProfitability measuresProfitability measures
Ratio of net sales to assets
Rate earned on total assets
Rate earned on stockholders’ equity
Rate earned on common stockholders’ equity
Earnings per share on common stock
Price earnings ratio
Dividends per share of common stock
Dividend yield
Summary of Analytical MeasuresSummary of Analytical Measures
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5Describe the contents
of corporate annual
reports.
Learning ObjectiveLearning Objective
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Profitability Measures — The Common StockholderProfitability Measures — The Common Stockholder
Dividend YieldDividend YieldDividend YieldDividend Yield
Use: To indicate the rate of return to common stockholders in terms of dividends.
Use: To indicate the rate of return to common stockholders in terms of dividends.
2004 2003Dividends per share of common $ 0.80 $ 0.60Market price per share of common $41.00 $27.00
Dividend yield on common stockDividend yield on common stock 1.95%1.95% 2.23%2.23%
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Corporate Annual ReportsCorporate Annual Reports
1. Financial Highlights2. President’s Letter to the Stockholders3. Management Report4. Independent Auditors’ Report5. Historical Summary
In addition to financial statements, the annual report includes: