Financial

Financial Statement
Statement
Analysis
Analysis
© 2001 Prentice-Hall, Inc.
Fundamentals of Financial Management, 11/e
Created by: Gregory A. Kuhlemeyer, Ph.D.
Carroll College, Waukesha, WI
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 Financial
Statement Analysis
 Financial Statements
 A Possible Framework for Analysis
 Ratio Analysis
 Trend Analysis
 Common-Size and Index Analysis

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 Examples of External Uses
of Statement Analysis
 Trade Creditors -- Focus on the
liquidity of the firm.
 Bondholders -- Focus on the
long-term cash flow of the firm.
 Shareholders -- Focus on the
profitability and long-term health of
the firm.
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 Examples of Internal Uses
of Statement Analysis
 Plan -- Focus on assessing the current
financial position and evaluating
potential firm opportunities.
 Control -- Focus on return on investment
for various assets and asset efficiency.
 Understand -- Focus on understanding
how suppliers of funds analyze the firm.

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 Primary Types of
Financial Statements
Balance Sheet
 A summary of a firm’s financial position on
a given date that shows total assets = total
liabilities + owners’ equity.
Income Statement
 A summary of a firm’s revenues and
expenses over a specified period, ending
with net income or loss for the period.
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 Basket Wonders’ Balance
Sheet (Asset Side)
Basket Wonders Balance Sheet (thousands) Dec. 31, 2020a
Cash and C.E. $ 90 a. How the firm stands on
Acct. Rec.c 394 a specific date.
Inventories 696 b. What BW owned.
Prepaid Exp d 5 c. Amounts owed by
Accum Tax Prepay 10 customers.
d. Future expense items
Current Assetse $1,195 already paid.
Fixed Assets (@Cost)f 1030 e. Cash/likely convertible
Less: Acc. Depr. g (329) to cash within 1 year.
Net Fix. Assets $ 701 f. Original amount paid.
Investment, LT 50 g. Acc. deductions for
6 Other Assets, LT 223 wear and tear.
b
 Basket Wonders’ Balance
Sheet (Liability Side)
Basket Wonders Balance Sheet (thousands) Dec. 31, 2020
Notes Payable $ 290 a. Note, Assets =
Acct. Payablec 94 Liabilities + Equity.
Accrued Taxes d 16 b. What BW owed and
Other Accrued Liab. d 100 ownership position.
Current Liab. e $
500 Long-Term Debt f c. Owed to suppliers for
530 Shareholders’ goods and services.
Equity Com. Stock ($1 d. Unpaid wages,
par) g 200 Add Pd in Capital g salaries, etc.
729 Retained e. Debts payable < 1 year.
Earnings h 210 Total f. Debts payable > 1 year.
7 Equity $1,139 g. Original investment.
a,b
 Basket Wonders’
Income Statement
Basket Wonders Statement of Earnings (in thousands)
for Year Ending December 31, 2020
Net Sales $ 2,211 a. Measures profitability
Cost of Goods Sold b 1,599 over a time period.
Gross Profit $ 612 b. Received, or receivable,
SG&A Expenses c 402 from customers.
EBITd $ c. Sales comm., adv.,
210 Interest Expensee officers’ salaries, etc.
59 EBT f $ d. Operating income.
151 Income Taxes e. Cost of borrowed funds.
60 EATg $ 91 f. Taxable income.
Cash Dividends 38 g. Amount earned for
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Increase in RE $ 53 shareholders.
 Framework for
Financial Analysis
Trend / Seasonal Component
How much funding will be
required in the future?
1. Analysis of the funds
needs of the firm.
Is there a seasonal
component?

Analytical Tools Used

Sources and Uses Statement
Statement of Cash Flows
Cash Budgets
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 Framework for
Financial Analysis

Health of a Firm

1. Analysis of the funds Financial Ratios

needs of the firm.
2. Analysis of the financial
condition and profitability 1. Individually
of the firm. 2. Over time
3. In
combination
4. In
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 Framework for
Financial Analysis

Business risk relates to

the risk inherent in the
1. Analysis of the funds
needs of the firm.
operations of the firm.
2. Analysis of the financial Examples:
condition and profitability
of the firm. Volatility in sales
3. Analysis of the business
risk of the firm.
Volatility in costs
Proximity to break-even
point
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 Framework for
Financial Analysis
A Financial
Manager
must
1. Analysis of the funds
needs of the firm. Determining consider all
2. Analysis of the financial
the three jointly
financing
condition and profitability
needs of
when
of the firm. determining
the firm.
3. Analysis of the business
risk of the firm.
the
financing
needs of the
12 firm.
 Framework for
Financial Analysis

1. Analysis of the funds

needs of the firm. Determining Negotiations
the
2. Analysis of the financial with
financing
condition and profitability suppliers of
needs of
of the firm. capital.
the firm.
3. Analysis of the business
risk of the firm.

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 Use of Financial Ratios

A Financial Ratio is Types of

an index that relates Comparisons
two accounting
Internal
numbers and is
Comparisons
obtained by dividing
one number by the External
other. Comparisons

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 External Comparisons and
Sources of Industry Ratios
This involves Examples:
comparing the ratios Robert Morris
of one firm with those Associates
of similar firms or with
Dun & Bradstreet
industry averages.
Almanac of
Similarity is important Business and
as one should Industrial
compare “apples to Financial Ratios
apples.”
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