CHAPTER 13
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Never answers questions by themselves
They do however
◦ Raise questions to answer
◦ Point to opportunities for further analysis
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Also include:
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Industry trends
Technological changes
Changes in consumer tastes
Changes in broad economic factors
Changes within company
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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
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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
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Accounting 101 ◦ Liquidity, Profitability, Long Term Solvency, Market
Strength
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Accounting 102 – Users
◦ Common Stockholders, Short-Term Creditors, Long
Term Creditors
◦ Summary of Ratios Exhibit 13-6 page 600
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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
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Gross Margin %
 Gross Margin/Sales
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Earnings Per share (EPS)
 Net Income-Preferred Div/Avg Common Stock O/S
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Price Earning Ratio
 Market Price/ EPS
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Dividend Payout
 Dividends per share/ EPS
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Dividend Yield
 Dividend per share/Market Price per share
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Return on Assets (simple version)
 Net Income / Average Total Assets
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Return On Equity (simple version)
 Net Income/ Average Total SE
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Book Value Per Share
 Stockholder’s Equity/ Shares Outstanding
EXERCISE 13-2 Page 608
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Basically--- ability to borrow money at a
lower rate 7% (pay your creditors)than your
net income percentage 10% (rate of return)
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Working Capital
 Current Assets – Current Liabilities
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Current Ratio
 Current Assets/Current Liabilities
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Acid-Test (Quick) Ratio
 Cash+Market Sec+A/R+ Short Term Invest/CL
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A/R Turnover
 Credit Sales/Avg A/R
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Avg Collection Period
 365/ A/R Turnover
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Inventory Turnover
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Average Sales Period
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Payables Turnover
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Average days Payables
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Operating Cycle in days
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Financing Requirement
 Cost of Goods Sold (COGS)/ Avg Inventory
 365/ inventory Turnover
 COGS + or – Change in Inventory/Average A/P
 365/Payables Turnover
 Average collection period(Days uncollectible) + Average
Sales Period (Inventory on hand)
◦ Operating Cycle – Average Days Payable
◦ EXERCISE 13-3 PG 608
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Times Interest Earned
 EBIT/ Interest Expense
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Debt to Equity
 Total Liabilities/ Stockholder’s Equity
 EXERCISE 13-4 PG 608
 SUMMARY OF RATIOS
Pg 600