Further Look At Financial Statements

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
• Dont 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 ???