1
Further Look At Financial
Statements
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Objective of financial reporting: provide info useful in making decisions
 To be useful information must be:
 Relevant: do you care?
 Reliable: can you count on it?
 Comparable: to my foreign competitors?
 Consistent: prepared same way last year?
2
Further Look At Financial
Statements
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Accounting constraints
 Materiality: does it matter?
 Waste basket: asset or expense?
 Same for every company?
 Conservatism:
 Don’t overstate income or assets
 What about liability and expenses?
3
Further Look At Financial
Statements

Uses of financial ratios
 Intracompany comprisons
 Ford 2010 sales versus 2009
 Intercompany comparisons
 Wal-Mart versus Target profit margin
 Industry comparisons
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McDonalds profit margin versus other restaraunts
4
Further Look At Financial
Statements
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Financial ratios
 Liquidity: can I pay my bills now?
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Short-term creditors
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Long-term creditors
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Stockholders
Solvency: can I pay my bills in the future?
Profitability: am I making money?
5
Further Look At Financial
Statements
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Financial ratios
 Liquidity:
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Current ratio: CA/CL
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Working capital: CA – CL
Quick: (CA – Inv)/CL
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Debt: Debt/Assets
Free cash flow: Operating cash flow – capital expenditures – dividends
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ROA: Net income/Assets
ROE: Net income/Stockholders Equity
Profit Margin = Net Income / Sales
 What is current asset? Current liability?
Solvency
Profitability:
6
Further Look At Financial
Statements

Depreciation
 Cost of asset / estimated useful life
 Guess
 Could property increase in value?
 Different amount on tax return?
 Not a cash expense
 Accumulated depreciation: total
 Cost – accumulated depreciation = ???