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CHAPTER

3 Financial Statements

Analysis and Long-Term Planning

1–2

Accounting as an Information SystemAccounting as an Information System

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Chapter Outline

3.1 Financial Statements Analysis

3.2 Ratio Analysis

3.3 The Du Pont Identity

3.4 Using Financial Statement Information

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3.1 Financial Statements Analysis

• Common-Size Balance Sheets– Compute all accounts as a percent of total assets

• Common-Size Income Statements– Compute all line items as a percent of sales

• Standardized statements make it easier to compare financial information, particularly as the company grows.

• They are also useful for comparing companies of different sizes, particularly within the same industry.

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3.2 Ratio Analysis

• Ratios also allow for better comparison through time or between companies.

• As we look at each ratio, ask yourself:– How is the ratio computed?– What is the ratio trying to measure and why?– What is the unit of measurement?– What does the value indicate?– How can we improve the company’s ratio?

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Categories of Financial Ratios

• Short-term solvency or liquidity ratios

• Long-term solvency, or financial leverage, ratios

• Asset management or turnover ratios

• Profitability ratios

• Market value ratios

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Payables Turnover

Number of times, on average, that a company pays its accounts payables in an accounting period

Payables Turnover = Net Purchases

Average Accounts Payable

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Days’ Payable

How long, on average, a company takes to pay its accounts payables

Days’ Payable =

Payables Turnover

365 days

進貨 銷貨 收現

平均銷售天數 平均收現天數 營 業 週 期

進貨 付現 收現 平均付款天數 現金週期

Days’ Sales in Receivables =

Gross Receivables / (Net Sales/365)

Assess how effectively a company manages its receivables by comparing days’ sales in receivables with its credit terms.

Liquidity of Inventory

Days’ sales in Inventory =

Ending Inventory / (Cost of Goods Sold /

365)

An indication of the length of time that it will take to use up the inventory through sales.

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3.3 The Du Pont Identity

ROE = NI / TE

= (NI / Sales) (Sales / TA) (TA / TE)

= PM * TAT * EM

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Using the Du Pont Identity

• ROE = PM * TAT * EM– Profit margin is a measure of the firm’s

operating efficiency – how well it controls costs.

– Total asset turnover is a measure of the firm’s asset use efficiency – how well it manages its assets.

– Equity multiplier is a measure of the firm’s financial leverage.

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3.4 Using Financial Statements

• Ratios are not very helpful by themselves: they need to be compared to something

• Time-Trend Analysis– Used to see how the firm’s performance is

changing through time

• Peer Group Analysis– Compare to similar companies or within

industries

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Potential Problems

• There is no underlying theory, so there is no way to know which ratios are most relevant.

• Benchmarking is difficult for diversified firms.• Globalization and international competition

makes comparison more difficult because of differences in accounting regulations.

• Firms use varying accounting procedures.• Firms have different fiscal years.• Extraordinary, or one-time, events