Lecture Accounting: What the numbers mean (10/e): Chapter 11 - Marshall, McManus, Viele

Chapter 11 - Financial statement analysis. After reading this chapter, you should be able to answer the following questions: How can liquidity measures be influenced by the inventory cost-flow assumption used? How do suppliers and creditors use a customer’s payment practices to judge liquidity? What are the influences of alternative inventory cost-flow assumptions and depreciation methods on turnover ratios? . | 2008 The McGraw Hill Companies Inc. All Rights Reserved. McGraw Hill Irwin Copyright 2014 by The McGraw Hill Companies Inc. All rights reserved. Chapter 11 Financial Statement Analysis PowerPoint Authors Susan Coomer Galbreath . CPA Charles W. Caldwell . CMA Jon A. Booker . CPA CIA Cynthia J. Rooney . CPA McGraw Hill Irwin Copyright 2014 by The McGraw Hill Companies Inc. All rights reserved. 1-3 Financial Statement Ratios Ratios are used to interpret the financial position and results of operations of an entity and may be grouped in the following four categories 1. Liquidity. 2. Activity. 3. Profitability. 4. Debt or financial leverage. 3 McGraw Hill Irwin 11 3 2008 The McGraw Hill Companies Inc. All Rights Reserved. 1-4 Consideration When Using Ratios Changes within the firm Industry Consumer trends tastes Technological changes Economic factors We should always look beyond the ratios. 4 McGraw Hill Irwin 11 4 2008 The McGraw Hill Companies Inc. All Rights Reserved. 1-5 L O 1 Consideration When Using Ratios Differences in accounting methods between companies sometimes make comparisons difficult. We use the LIFO method We use the FIFO method to value inventory. to value inventory. 5 McGraw Hill Irwin 11 5 2008 The McGraw Hill Companies Inc. All Rights Reserved. 1-6 L O 2 Liquidity Measures The liquidity measures of working capital current ratio and acid test ratio were discussed in Chapter 3. 6 McGraw Hill Irwin 11 6 2008 The McGraw Hill Companies Inc. All Rights Reserved. 1-7 L O 2 Liquidity Measures Is the firm paying What are the its bills promptly firm s working Are all cash capital and discounts taken liquidity ratios Creditors Creditors Suppliers Suppliers 7 McGraw Hill Irwin 11 7 2008 The McGraw Hill Companies Inc. All Rights Reserved. 1-8 L O 3 Turnover Ratios Differences in inventory cost flow assumptions and depreciation methods will affect comparability of turnover ratios. We Wereport report We Wehave have lower lower lower lower .