i i Review:i Financial Statements and Ratios - 1
Review of Financial Statements and Ratios
i
I.i Basic Financial Statements
i
A.i Income Statement - summary of firm’s accounting revenues, expenses, and profits
over some time period
i
Ex.ii=> see Consolidated Statements of Income for Dell Inc. from the 10-k filed
with SEC for fiscal 2005
i
B.i Balance Sheet - summary of accounting values of a firm’s assets and claims
against those assets
i
Ex.i=> see Consolidated Statements of Financial Position for Dell Inc. from the
10-k for fiscal 2005
i
II.i Standardized Financial Statements
i
1.i Common-size balance sheets
i
=> compute all accounts as a percent of total assets
i
2.i Common-size income statements
i
=> compute all line items as a percent of sales
i
Uses for common size statements:i
i
1) easier to compare firms of different sizes
2) easier to compare financial information across time as firm grows
i
III.i Ratios
i
A.i Overview
i
1.i Ratios examine relationships between numbers on financial statements
i
2.i Internal uses
i
1) evaluate performance and determine compensation
2) plan for the future
i
3.i External uses:i Analysis of firm by:i
i
1)i Suppliers
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, i i Review:i Financial Statements and Ratios - 2
2)i Creditors
3)i Stockholders
4)i Customers
5)i Competitors
i
A.i Ratio Analysis
i
1.i Key => Ratios don’t reveal much by themselves so usually make two basic
types of comparisons:i
i
1)i industry averages or ratios of strongest competitors
SIC or NAICS codes to determine industry
2)i firm’s past own ratios
i
2.i Sources of Industry Ratios
i
1)i RMA
2)i MarketGuide.com
3)i moneycentral.msn.com
i
B.i Warning Signs
i
1.i Ratios “too” high or low compared to industry or competitors
i
2.i Ratios trending away from industry or competitors
i
Note: We’ll use Dell for examples
i
=> see Dell’s financial statements for fiscal 2005 (ends January 28, 2005) and
fiscal 2004 (ends January 30, 2004).i
i
C.i Cautions:iii
i
1.i Different people and different sources calculate ratios in different ways
i
=> be sure comparing ratios calculated in the same way.i
i
2.i Ratios indicate potential sources of problems
i
=> tell us where to look
i
3.i Ratios are sensitive to accounting method used
4.i Ratios are based on accounting numbers rather than value and cash flows
5.i Ratios can be distorted in seasonal businesses.i
i
i i jay top
Review of Financial Statements and Ratios
i
I.i Basic Financial Statements
i
A.i Income Statement - summary of firm’s accounting revenues, expenses, and profits
over some time period
i
Ex.ii=> see Consolidated Statements of Income for Dell Inc. from the 10-k filed
with SEC for fiscal 2005
i
B.i Balance Sheet - summary of accounting values of a firm’s assets and claims
against those assets
i
Ex.i=> see Consolidated Statements of Financial Position for Dell Inc. from the
10-k for fiscal 2005
i
II.i Standardized Financial Statements
i
1.i Common-size balance sheets
i
=> compute all accounts as a percent of total assets
i
2.i Common-size income statements
i
=> compute all line items as a percent of sales
i
Uses for common size statements:i
i
1) easier to compare firms of different sizes
2) easier to compare financial information across time as firm grows
i
III.i Ratios
i
A.i Overview
i
1.i Ratios examine relationships between numbers on financial statements
i
2.i Internal uses
i
1) evaluate performance and determine compensation
2) plan for the future
i
3.i External uses:i Analysis of firm by:i
i
1)i Suppliers
i i jay top
, i i Review:i Financial Statements and Ratios - 2
2)i Creditors
3)i Stockholders
4)i Customers
5)i Competitors
i
A.i Ratio Analysis
i
1.i Key => Ratios don’t reveal much by themselves so usually make two basic
types of comparisons:i
i
1)i industry averages or ratios of strongest competitors
SIC or NAICS codes to determine industry
2)i firm’s past own ratios
i
2.i Sources of Industry Ratios
i
1)i RMA
2)i MarketGuide.com
3)i moneycentral.msn.com
i
B.i Warning Signs
i
1.i Ratios “too” high or low compared to industry or competitors
i
2.i Ratios trending away from industry or competitors
i
Note: We’ll use Dell for examples
i
=> see Dell’s financial statements for fiscal 2005 (ends January 28, 2005) and
fiscal 2004 (ends January 30, 2004).i
i
C.i Cautions:iii
i
1.i Different people and different sources calculate ratios in different ways
i
=> be sure comparing ratios calculated in the same way.i
i
2.i Ratios indicate potential sources of problems
i
=> tell us where to look
i
3.i Ratios are sensitive to accounting method used
4.i Ratios are based on accounting numbers rather than value and cash flows
5.i Ratios can be distorted in seasonal businesses.i
i
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