Financial Statements and Ratio
Analysis
Chapter Number Chapter 3
Subject COF
Financial Statements and Ratio Analysis 1
, 📖 Table of Contents
Outline
3.1 The Stockholders’ Report
THE LETTER TO STOCKHOLDERS
THE FOUR KEY FINANCIAL STATEMENTS
Income Statement
Balance Sheet
Statement of Retained Earnings
Statement of Cash Flows
NOTES TO THE FINANCIAL STATEMENTS
CONSOLIDATING INTERNATIONAL FINANCIAL STATEMENTS
3.2 Using Financial Ratios
TYPES OF RATIO COMPARISONS
Cross-Sectional Analysis
Time-Series Analysis
Combined Analysis
CAUTIONS ABOUT USING RATIO ANALYSIS
3.3 Liquidity Ratios
CURRENT RATIO
QUICK (ACID-TEST) RATIO
3.4 Activity Ratios
INVENTORY TURNOVER
AVERAGE COLLECTION PERIOD
AVERAGE PAYMENT PERIOD
TOTAL ASSET TURNOVER
3.5 Debt Ratios
DEBT RATIO
DEBT-TO-EQUITY RATIO
TIMES INTEREST EARNED RATIO
FIXED-PAYMENT COVERAGE RATIO
3.6 Profitability Ratios
COMMON-SIZE INCOME STATEMENTS
GROSS PROFIT MARGIN
OPERATING PROFIT MARGIN
NET PROFIT MARGIN
EARNINGS PER SHARE (EPS)
RETURN ON TOTAL ASSETS (ROA)
RETURN ON EQUITY (ROE)
3.7 Market Ratios
PRICE/EARNINGS (P/E) RATIO
Financial Statements and Ratio Analysis 2
, MARKET/BOOK (M/B) RATIO
3.8 A Complete Ratio Analysis
DUPONT SYSTEM OF ANALYSIS
DuPont Formula
Modified DuPont Formula
Applying the DuPont System
3.1 The Stockholders’ Report
📍 generally accepted accounting principles (GAAP): The practice and
procedure guidelines used to prepare and maintain financial records and
reports; authorized by the Financial Accounting Standards Board (FASB).
📍 Financial Accounting Standards Board (FASB): The accounting
profession’s rule-setting body, which authorizes generally accepted
accounting principles (GAAP).
📍 Public Company Accounting Oversight Board (PCAOB): A not-for-
profit corporation established by the Sarbanes-Oxley Act of 2002 to protect
the interests of investors and further the public interest in the preparation
of informative, fair, and independent audit reports.
Congress charged the PCAOB with protecting the interests of investors and
furthering the public interest in the preparation of informative, fair, and independent
audit reports.
The U.S. Securities and Exchange Commission (SEC)—the federal regulatory body
that governs the sale and listing of securities—requires publicly owned corporations
with more than $5 million in assets and 500 or more stockholders to provide their
stockholders with an annual stockholders’ report.
Financial Statements and Ratio Analysis 3
Analysis
Chapter Number Chapter 3
Subject COF
Financial Statements and Ratio Analysis 1
, 📖 Table of Contents
Outline
3.1 The Stockholders’ Report
THE LETTER TO STOCKHOLDERS
THE FOUR KEY FINANCIAL STATEMENTS
Income Statement
Balance Sheet
Statement of Retained Earnings
Statement of Cash Flows
NOTES TO THE FINANCIAL STATEMENTS
CONSOLIDATING INTERNATIONAL FINANCIAL STATEMENTS
3.2 Using Financial Ratios
TYPES OF RATIO COMPARISONS
Cross-Sectional Analysis
Time-Series Analysis
Combined Analysis
CAUTIONS ABOUT USING RATIO ANALYSIS
3.3 Liquidity Ratios
CURRENT RATIO
QUICK (ACID-TEST) RATIO
3.4 Activity Ratios
INVENTORY TURNOVER
AVERAGE COLLECTION PERIOD
AVERAGE PAYMENT PERIOD
TOTAL ASSET TURNOVER
3.5 Debt Ratios
DEBT RATIO
DEBT-TO-EQUITY RATIO
TIMES INTEREST EARNED RATIO
FIXED-PAYMENT COVERAGE RATIO
3.6 Profitability Ratios
COMMON-SIZE INCOME STATEMENTS
GROSS PROFIT MARGIN
OPERATING PROFIT MARGIN
NET PROFIT MARGIN
EARNINGS PER SHARE (EPS)
RETURN ON TOTAL ASSETS (ROA)
RETURN ON EQUITY (ROE)
3.7 Market Ratios
PRICE/EARNINGS (P/E) RATIO
Financial Statements and Ratio Analysis 2
, MARKET/BOOK (M/B) RATIO
3.8 A Complete Ratio Analysis
DUPONT SYSTEM OF ANALYSIS
DuPont Formula
Modified DuPont Formula
Applying the DuPont System
3.1 The Stockholders’ Report
📍 generally accepted accounting principles (GAAP): The practice and
procedure guidelines used to prepare and maintain financial records and
reports; authorized by the Financial Accounting Standards Board (FASB).
📍 Financial Accounting Standards Board (FASB): The accounting
profession’s rule-setting body, which authorizes generally accepted
accounting principles (GAAP).
📍 Public Company Accounting Oversight Board (PCAOB): A not-for-
profit corporation established by the Sarbanes-Oxley Act of 2002 to protect
the interests of investors and further the public interest in the preparation
of informative, fair, and independent audit reports.
Congress charged the PCAOB with protecting the interests of investors and
furthering the public interest in the preparation of informative, fair, and independent
audit reports.
The U.S. Securities and Exchange Commission (SEC)—the federal regulatory body
that governs the sale and listing of securities—requires publicly owned corporations
with more than $5 million in assets and 500 or more stockholders to provide their
stockholders with an annual stockholders’ report.
Financial Statements and Ratio Analysis 3
