CHAPTER 13

Never answers questions by themselves They do however

◦ Raise questions to answer◦ Point to opportunities for further analysis

Also include:◦ Industry trends◦ Technological changes◦ Changes in consumer tastes◦ Changes in broad economic factors◦ Changes within company

Examines changes in accounts over time Select a year as the “BASE YEAR” = 100% Every year is a % of that year. New #/Base Year Usually over 5 or 10 years Can compare any account to see how it has

changed over the years Page 586 McDonalds(#s), Graph When“Super size Me”? Change over two years in $ and % page 606 13-1 Exercise 13-10 Trend % pg 610

Relationship between accounts Balance Sheet - % of Total Assets pg 585

Income Statement - % of Sales pg 586 Change over two years in $ and % page 606

13-1

Accounting 101 - ◦ Liquidity, Profitability, Long Term Solvency,

Market Strength

Accounting 102 – Users◦ Common Stockholders, Short-Term Creditors,

Long Term Creditors◦ Summary of Ratios Exhibit 13-6 page 600

Numerator Denomiator

Num goes up ratio goes up Dem goes up ratio goes down Num goes down ratio goes down Dem goes down ratio goes up

Gross Margin % Gross Margin/Sales

Earnings Per share (EPS) Net Income-Preferred Div/Avg Common Stock O/S

Price Earning Ratio Market Price/ EPS

Dividend Payout Dividends per share/ EPS

Dividend Yield Dividend per share/Market Price per share

Return on Assets (simple version) Net Income / Average Total Assets

Return On Equity (simple version) Net Income/ Average Total SE

Book Value Per Share Stockholder’s Equity/ Shares Outstanding

EXERCISE 13-2 Page 608

Basically--- ability to borrow money at a lower rate 7% (pay your creditors)than your net income percentage 10% (rate of return)

Working Capital Current Assets – Current Liabilities

Current Ratio Current Assets/Current Liabilities

Acid-Test (Quick) Ratio Cash+Market Sec+A/R+ Short Term Invest/CL

A/R Turnover Credit Sales/Avg A/R

Avg Collection Period 365/ A/R Turnover

Inventory Turnover Cost of Goods Sold (COGS)/ Avg Inventory

Average Sales Period 365/ inventory Turnover

Payables Turnover COGS + or – Change in Inventory/Average A/P

Average days Payables 365/Payables Turnover

Operating Cycle in days Average collection period(Days uncollectible) + Average

Sales Period (Inventory on hand) Financing Requirement

◦ Operating Cycle – Average Days Payable◦ EXERCISE 13-3 PG 608

Times Interest Earned EBIT/ Interest Expense

Debt to Equity Total Liabilities/ Stockholder’s Equity

EXERCISE 13-4 PG 608

SUMMARY OF RATIOS Pg 600