Evaluation of

1
Chapter 3

• Evaluation of
• Financial Performance

2
Key Financial Statements

• Balance Sheet
• Identifies assets, liabilities, and equity
• Snapshot of financial position at a specific date
• Income Statement
• How much did we make?
• Typically measured quarterly and annually
• Statement of Cash Flows (Chapter 4)
• How did we get/spend our cash
• Typically measured quarterly and annually

3
Balance SheetAssets Liabilities Owners
Equity

• Current Assets
• Cash
• Marketable Securities
• Accounts Receivable
• Inventories
• Prepaid Assets (Insurance)
• Fixed assets
• Land
• Net Plant and Equipment
• Property, Plant, Equip.
• Less Accum. Depreciation

• Current Liabilities
• Accounts Payable
• Notes Payable
• Accrued Liabilities (Wages)
• Long Term Liabilities
• Long-Term Debt
• Owners Equity
• Common Stock
• Addl Paid in Capital
• Retained Earnings

4
Income Statement

• Net Revenue (Sales)
• - Cost of Goods Sold
• Gross Profit
• - Operating Expenses
• Earnings Before Interest and Taxes (EBIT)
• - Interest Expense
• Income Before Taxes (EBT)
• - Income Taxes
• Net Income or Earnings After Taxes (EAT)

5
Create a Balance Sheet and Income Statement for
Dooley Sportswear
6
Retained Earnings Formula

• Retained Earnings Prior Year
• Net Income
• - Dividends
• Retained Earnings Current Year
• ?R/E Net Income - Dividends

Change in R/E
7
Retained Earnings Example 1

• If Retained Earnings increased by 120,000 and
  Net Income was 180,000, then what were
  Dividends?
• ?R/E Net Income Dividends
• 120,000 180,000 60,000

8
Retained Earnings Example 2

• If Retained Earnings decreased by 40,000 and
  Dividends were 140,000, then what was Net
  Income?

9
Retained Earnings Example 3

• If Dooley Sportswear had 11,750 in Dividends,
  then what was the Retained Earnings balance at
  the end of last year?

10
Financial Ratios

• Tools that help us determine the financial health
  of a company.
• We can compare a companys financial ratios with
  the ratios from prior years
• Trend Analysis
• We can compare a companys financial ratios with
  those of its industry competitors.

11
Financial Ratios Are Used By

• Management for planning, evaluating, and
  comparing to competitors/history
• Credit managers to estimate the riskiness of
  potential borrowers
• Investors to evaluate corporate securities

12
Ratio Classifications

• Liquidity
• Asset management
• Financial leverage management
• Profitability
• Market-based
• Dividend policy

13
Financial Ratio Analysis

• Trend analysis 2000 01 02
• XYZ current ratio 1.9 2.2
  2.3
• Cross-sectional analysis 2002
• XYZ current ratio
  2.3
• Industry norms
  2.5
• Both simultaneously 2000 01 02
• XYZ current ratio 1.9 2.2
  2.3
• Industry norms 2.5 2.4
  2.5

14
Financial Ratio Analysis
15
Limitations on Ratio Analysis

• Firms in Multiple Industries
• Select Appropriate Peer Group
• Seasonality of Operations
• Use Most Relevant Period
• Flexibility within GAAP
• LIFO/FIFO inventory valuation
• Focus on Historical Results
• Using Industry Averages as Benchmarks
• Select Comparable Competitor
• Reliability of Published Industry Averages

16
Limitations on Ratio Analysis

• Firms in Multiple Industries
• Select Appropriate Peer Group
• Seasonality of Operations
• Use Most Relevant Period
• Flexibility within GAAP
• LIFO/FIFO inventory valuation
• Focus on Historical Results
• Using Industry Averages as Benchmarks
• Select Comparable Competitor
• Availability/Reliability of Published Industry
  Averages

17
Homework Problem 10

• Ignore Individual Parts to Problem.
• Only do Ratios from Handout (6 for this Problem)
  and Compare to Industry (if available).