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Fundamentals of Financial Accounting & Analysis

Essay by   •  October 25, 2017  •  Essay  •  1,078 Words (5 Pages)  •  940 Views

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                                                                                                           Notes[pic 1]

Class Notes

for

Chapter Four

of

Fundamentals of Financial Accounting & Analysis

[pic 2]

Notes


Contents

Financial Statement Analysis        1

Basic and Diluted EPS        7

Analysts’ Consensus EPS        8

Pro forma EPS        9


Financial Statement Analysis

Below are 5 general steps for analyzing a firm:

  1. Choose a purpose for the analysis and relevant decision criteria.

 

Loan money to?  Invest in?  Sell to?  Buy from?  Work for? Compete against?  Etc.

  1. Gather data.

Sources include 10-K, 10-Q, press releases, news articles, spying(!?), etc.

  1. Perform quantitative and qualitative assessments of data.

Ratios, “SWOT,” “5 Forces,” etc.

  1. Predict the relevant future, based upon the above steps.

For instance, build a pro forma financial model that goes out 1, 2, 3, 5, 10 years.

  1. Conduct a sensitivity test on the model in 4 and make a decision.

For instance, change assumptions, e.g. sales growth, margins, etc., and then decide whether to invest in, lend to, sell to, buy from, work for the firm.

All purposes (identified in Step 1) require quantitative and qualitative assessments of data (Step 3).  

Quantitative analysis involves ratio analysis.  

Ratios are simply divisions of numbers.  

When we blindly calculate them without thinking, we run into trouble.  

Name some of the warnings about ratios identified in FFAA Chapter 4:

Give the formulas for the following ratios or amounts:

Gross Profit (Gross Margin) (absolute measure)

Gross Margin Ratio (relative measure)

EBIT (absolute measure)

EBIT Margin Ratio (relative measure)

Current Ratio

Days sales in inventory

Days sales outstanding

Days payables outstanding

Debt to capital


Give the formula of the ratio that would be appropriate to answer each of the following questions:

How long does it take a firm to pay its bills (on average)?

How long does it take a firm to sell its inventory (on average)?

How long does it take a firm to collect cash from its receivables (on average)?

What is the firm's capital structure?

How well did the firm's assets perform in generating net income?

How much of the firm's net income was paid as dividends to the owners?

What does the stock market estimate the value of the firm to be?

What is the approximate cost of the firm's debt on a pretax basis?

What is the approximate cost of the firm's equity?

What is the firm's effective tax rate?

Below are data for calculating the ratios shown in FFAA, Chapter 4.

Income Statement Data Items

Year 4

Sales

800

COGS

500

SG&A Expense

120

Depreciation Expense

80

Operating Income (EBIT)

100

Interest Expense

14

Pre Tax Income

86

Tax Expense

30

Net Income

56

Dividends per Share

0.06

Balance Sheet Data Items

Year 4

Cash and Cash Equivalents

20

Short term Investments

10

Accounts Receivable

70

Inventory

180

Total Current Assets

280

Total Assets

900

Accounts Payable

80

Total Current Liabilities

80

Interest Bearing Debt

300

Owners' Equity

520

Number of Shares Outstanding (#)

100

Cash Flow Data Items

 

Operating Cash Flow

40

Capital Expenditures

-15

Net Change in Interest Bearing Debt

8

Dividends paid

-6

Share repurchases (in $)

-20

Other Items

 

Beta

1

Year End Stock Price (FYE Year 4)

 $15.00

Year End Stock Price (FYE Year 3)

$12.00

Calculate the below ratios and show the calculations in the space provided.

...

...

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