Chapter 2: Introduction to Financial Statement Analysis

Chapter 2: Introduction to Financial Statement Analysis-1
Chapter 2: Introduction to Financial Statement Analysis
Ratios to add or define:
Total Debt
Total Assets
- as with the debt-equity ratio, the book value version of this ratio is not especially useful
compared to the market value ratio
Debt - Asset Rate 
Current Ratio 
Quick Ratio 
Current Assets
Current Liabilities
Current Assets Except Inventory
Current Liabilities
Interest Coverage Ratio 
Earnings Before Interest and Taxes
Interest Expense
Note: operating income or EBITDA is often used instead of EBIT
Return on Assets 
Net Income
Book Value of Assets
The following are the comments and views of Dr. Rich:
p. 22: Depreciation: Depreciation spreads the cost of long-term assets over some measure of the
asset’s life on a dollar for dollar basis (and thus violates the time value of money). The book
value of a long-term asset equals the remaining difference between what was spent to acquire
the asset and what has been recognized as an expense through depreciation.
p. 23: Goodwill: In June 2001, the FASB changed the guidelines so that firms are no longer
required to amortize goodwill. Instead, goodwill is written down if worth less than shown on
balance sheet. This write-down is called impairment.
p. 24: Deferred taxes: Deferred taxes store the difference between IRS taxes and GAAP taxes.
Since IRS taxes are what are owed but GAAP taxes are what are recognized (for statements),
the balance sheet won’t balance without adding deferred taxes to the balance sheet.
p. 26: Footnote 3 is important:
- market value of debt generally not very different from book value of debt.
- distinction between the market and book value of debt often ignored in practice.
p. 29: Accounts Receivables Days: Number of days to collect receivables on average.
Notes, additions, and corrections