In this chapter, you will know how to standardise financial statements for comparison purposes, know how to compute and interpret important financial ratios, know the determinants of a firm’s profitability and growth, understand the problems and pitfalls in financial statement analysis. | Chapter 3 Lecture - Working with Financial Statements Chapter 3 Lecture - Working with Financial Statements Learning Objectives After studying this chapter, you should be able to: LO 1 Standardize financial statements for comparison purposes. LO 2 Compute and, more important, interpret some common ratios. LO 3 Assess the determinants of a firm's profitability and growth. LO 4 Identify and explain some of the problems and pitfalls in financial statement analysis. 3-1 3-2 Prufrock Corporation Balance Sheets Standardized Financial Statements • Common-Size Balance Sheets – All accounts = percent of total assets (%TA) • Common-Size Income Statements – All line items = percent of sales or revenue (%SLS) • Standardized statements are useful for: – Comparing financial information year-to-year – Comparing companies of different sizes, particularly within the same industry 3-3 3-4 1 Chapter 3 Lecture - Working with Financial Statements Prufrock Corporation Prufrock Corporation Common-Size Balance Sheets Income Statement 3-5 3-6 Prufrock Corporation Ratio Analysis Common-Size Income Statement • Allow for better comparison through time or between companies • Used both internally and externally • For each ratio, ask yourself: – What the ratio is trying to measure – Why that information is important Tells us what happened to each dollar of sales 3-7 3-8 2 Chapter 3 Lecture - Working with Financial Statements Common Financial Ratios Categories of Financial Ratios • Liquidity ratios or Short-term solvency • Financial leverage ratios or Long-term solvency ratios • Asset management or Turnover ratios • Profitability ratios • Market value ratios 3-9 3-10 Liquidity Ratios ASSETS Current Assets Cash Accounts Receivable Inventory Total $ $ $ $ Fixed Assets Net Plant & Equipment Total Asets $ $ PRUFROCK Balance Sheet - 2016 Liabilities & Owners Equity Current Liabilities 98 Accounts Payable 188 Notes Payable 422 Total 708 Long term debt Owners' .
