Chapter 8 - Analysis of financial statements. This chapter presents the following content: Ratio analysis, du pont system, effects of improving ratios, limitations of ratio analysis, qualitative factors. | CHAPTER 8 Analysis of Financial Statements Topics in Chapter Ratio analysis Du Pont system Effects of improving ratios Limitations of ratio analysis Qualitative factors Income Statement 2009 2010E Sales $5,834,400 $7,035,600 COGS 4,980,000 5,800,000 Other expenses 720,000 612,960 Deprec. 116,960 120,000 Tot. op. costs 5,816,960 6,532,960 EBIT 17,440 502,640 Int. expense 176,000 80,000 EBT (158,560) 422,640 Taxes (40%) (63,424) 169,056 Net income ($ 95,136) $ 253,584 Balance Sheets: Assets 2009 2010E Cash $ 7,282 $ 14,000 S-T invest. 20,000 71,632 AR 632,160 878,000 Inventories 1,287,360 1,716,480 Total CA 1,946,802 2,680,112 Net FA 939,790 836,840 Total assets $2,886,592 $3,516,952 Balance Sheets: Liabilities & Equity 2009 2010E Accts. payable $ 324,000 $ 359,800 Notes payable 720,000 300,000 Accruals 284,960 380,000 Total CL 1,328,960 1,039,800 Long-term debt 1,000,000 500,000 Common stock 460,000 1,680,936 Ret. earnings 97,632 296,216 Total equity 557,632 1,977,152 Total L&E $2,886,592 $3,516,952 Other Data 2009 2010E Stock price $ $ # of shares 100,000 250,000 EPS -$ $ DPS $ $ Book val. per sh. $ $ Lease payments $40,000 $40,000 Tax rate Why are ratios useful? Standardize numbers; facilitate comparisons Used to highlight weaknesses and strengths Five Major Categories of Ratios Liquidity: Can we make required payments as they fall due? Asset management: Do we have the right amount of assets for the level of sales? (More ) Ratio Categories (Continued) Debt management: Do we have the right mix of debt and equity? Profitability: Do sales prices exceed unit costs, and are sales high enough as reflected in PM, ROE, and ROA? Market value: Do investors like what they see as reflected in P/E and M/B ratios? Forecasted Current and Quick Ratios for 2010. CR10 = = = . QR10 = = = . CA CL $2,680 $1,040 $2,680 - $1,716 $1,040 CA - Inv. CL Comments on CR and QR 2010E 2009 2008 Ind. CR | CHAPTER 8 Analysis of Financial Statements Topics in Chapter Ratio analysis Du Pont system Effects of improving ratios Limitations of ratio analysis Qualitative factors Income Statement 2009 2010E Sales $5,834,400 $7,035,600 COGS 4,980,000 5,800,000 Other expenses 720,000 612,960 Deprec. 116,960 120,000 Tot. op. costs 5,816,960 6,532,960 EBIT 17,440 502,640 Int. expense 176,000 80,000 EBT (158,560) 422,640 Taxes (40%) (63,424) 169,056 Net income ($ 95,136) $ 253,584 Balance Sheets: Assets 2009 2010E Cash $ 7,282 $ 14,000 S-T invest. 20,000 71,632 AR 632,160 878,000 Inventories 1,287,360 1,716,480 Total CA 1,946,802 2,680,112 Net FA 939,790 836,840 Total assets $2,886,592 $3,516,952 Balance Sheets: Liabilities & Equity 2009 2010E Accts. payable $ 324,000 $ 359,800 Notes payable 720,000 300,000 Accruals 284,960 380,000 Total CL 1,328,960 1,039,800 Long-term debt 1,000,000 500,000 Common stock 460,000 1,680,936 Ret. earnings 97,632 296,216 Total equity 557,632 1,977,152 Total
