Chapter 14

 Performance Measurement

• Comparative Analysis

• Horizontal, Vertical and Ratio Analysis

• Liquidity Ratios

• Current Ratio, Receivables Turnover, inventory turnover

• Liquidity conclusion and summary of liquidity ratios

• Solvency Ratios

• Debt to total assets, times interest earned, free cash flow

• Solvency conclusion and summary of solvency ratios

• Profitability Ratios

• Gross profit margin, profit margin, asset turnover, return on assets, return on common shareholders' equity, basic earnings per share, proce-earnign P-E, payout ratio, dividend yield

• Profitability conclusion and summary of profitability ratios

• Limitations

• Deviersications

• Alternative accounting

• Other income

• Nonercurring items

 

Comparative Analysis

• Making comparisions about a company's past and current financial performance and position to  better determine future expectations

• Financial data as well as nonfinancal info should be reveiwed

• Company's mission

• Strategy

• Goals and objectives

• Management discussitons and Analysis

 

 

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Horizontal Analysis

• Also known as trend analysis

• Express the change increase or decrease over time

• Allows intra company comparsions

• Comparing current data with other periods

• Can be expressed as an amount or percentage

• %of base year amount

• %change for the year

 

 

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Vertical Analysis

• Also known as common size analysis

• Expresses each item in a statement as a percent of a total amount

• Comparsion of data within the statement nad within the same year

• Expressed as a percentage

 

 

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Ratio Analysis

• Liquidity Ratios

• Measure short-term ability of the company to pay its maturing obligations and to meet unexpected meeds for cash

• Current Ratio

• Measures short term debt ability and liability

• Currents Ratio = Currents Assets/ Currents liabilities

• Important to look at its components when assessing current ratio be cautious about influences of slow moving inventory

• Receivables turnover

• Measures liquidity receivables

• Receivables turnover = Credit sales/ Average gross accounts Receivables

• Average collection period

• Measures number of days receivables are outstanding

• Average collection period = 365 days/ receivablse turnover

• Inventory turnover

• Measures liquidity of inventory

• Inventory turnover = Cost of Goods Sold/ Average Inventory

• Days in inventory

• Measures number of days inventory is on hand

• Days in ventory = 365 days /inventory turnover

• Solvecy ratios

• Measrue the ability tof the company to surviv over a long period of time the ability to pay its total liabilities

• Debt to total assets

• Measures % of total assets provided financed with debt

• Debt to total assets = Total liabilites/total assets

• Times interest earned

• Measures ability to meet interest payments as they come due

• Times interest earned = Net income +Interest expense+ income tax expense/interest expense

• Free cash flow

• Measures cash availbale for paying dividends or expanding operations

• Net cash provided by operating activities - net capital expenditures - dividends paid = free cash flow

• Profitability ratios

• Measure the operating success of a company for a specific period of time.

• Gross Profit Margin

• Measures margin between selling price and cost of goods sold

• Gross profit margin = gross profit /sales

• Progit Margin

• Measures the percentage of profit generated by each dollar of sales

• Profit Margin = Net income/sales

• Asset turnover

• Measures how efficiently assets are used to generate sales

• Asset turnover = sales/average total assets

• Return on assets

• Measures overall profitability of assets

• Return on assets= net income/average total assets

• Return on common shareholders' equity

• Measures overall profitability of shareholders' investment

• Return on common shareholders' equity = net income- preferred dividends declared/average common shareholder's equity

• Average common shareholders' equity = total shareholders' equity - preferred shares

• Basic earning per share

• Measures profit earned on each common share

• Earnings per share = net incoem -

• Price earning ratio

• Payout raio

• Dividend yield.

Chapter 13

 Statement of Cash Flows

• Reporting of cash flows

• Classification, format and prep of statement of cash flows

• Indirect method

• Operating activities section

• Prep of operating activities section

• Summary of conversion to net cash provided (used) by operating activities

• Investing activies

• Prep of investing section

• Financing activitie section and completion of statement of cash flows

• Prepparation fo financing activities section

• Completion of statement of cash flows

• Using cash flows to evaluate a company

• Corporate life cycle and cash flows; free cash flow

• Direct method

• Operating section

• Cash recepts and payment

• Summary of conversion to net cash provided by operating activities

 

Purpose of statement of cash flows

• Helps users assess a company's ability to generate cash from its operating acitivites

• How the company received and used other cash flows regarding investing and finacing activities

• This is useful in determing a company's ability to generate future cash flows

• Investing and finacing transactions during the period, and effect upon capital structure

• Making comparsions with other companies

 

Definition of Cash Classification of Cash Flows

• Cash may include cash equivalents

• Short term, highly liquid investments that have insignificant risk and are readily ocnverted to cash within a short period of time

• Cash receipts and payments are classified into 3 categories

• Operating

• Investing

• Financing

 

Operating

• Related to a company's principlal income-producing activites

• Activities relate to cash effects of transactions that create revenues and epxneses that enter into determination of net income

• Includes relevant noncash curent assets and current liabilities on that statement of financial postion, where the rlated account is a statmet of income accoutn

 

Investing

• Related to the aquistion and disposal of non-current assets

• Purcahsing and disposing of

• Long lived assets and investments hot held for trading

• Generally includes non-current asset items on the statement of financial position

 

Financing

• Related to changes in a company's debt and equity, including

• Obtaining cash from issuing debt and repaying the amounts borrowed

• Obtaining cash from selling common and preferred shares and paying devidends

• Generally includes non-current liabilities, and shareholders' equity items

Significant noncash activities

• If it does not affect cash, do not report in statement of cash flows

• Report in spearate note to the financial statements

• Examples

• Issue of shares to purchase assets or to reduce liabilities

• Conversion of debt into equity

• Exchange of property, plant and equipment

 

 

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Indirect vs. Direct Method

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Step 1: Operating Activities

• Determine the net cash provided by operating actviities by converting net icnome form an accrual basis to cash basis

• Conversion may be done by either indirect or direct method

• Both arrive at same aomount

• Most companies favour indirect method

• Easier to prepare

• Reveals less info

 

Prepare the operating activities section using the indirect method

• Start with net income and add or deduct items not affecting cash to arive at net cash provided by oeprating acitivities

• Add non cash expenses suhc as depreiation and losses

• Subtract non cash gains

• + Decreases in current asset accounts and increases in current liability accounts

•  - Increases in current asset accounts and decreases in current liability accounts

Summary of Adjustments to Determine Net Cash Provided by operating activities -indirect method

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Net cash provided by operating activities -indiect method

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Step 2: Investing Activities

• Measure cash flows relating to non-current asset accounts; long-term investments; propty , plant and equipment; intangible assets

• Reported the same under both direct and indirect methods

Assets acquisitions are uses cash;disposals are sources of cash

• Depreciation expense is a noncash charge

 

Net Cash provided by investing activities

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Step 3: Financing activities

• Determine the net cash provided by financing activities by looking at changes in non-current liabs and equity accounts

• Changes to notes, loans and mortgages, and bonds payable for cause of change

• Share capital and retained earnings accounting for changes and cause

• Profit is reported in the operating activities section

 

Net Cash Provided by Financing Activities

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Step 4: Complete the statement of cash flows

• Complete the statement by combing the operating and all other sections

• Determine increase(decrease) in cash for the period

• Ensure ending cash balance agrees wo that reported on statement of financal positon

• Identify any non cash discloseures

• x

 

 

Statement of Cash Flows Indirect method

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Using Cash Flows to Evaluate a Company

• Corporate Life cycle and Cash flows

• 4 Phases:

• Intro

• Growth

• Maturity

• Decline

• Helps to understand a company's cash flow from activities

 

 

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Free Cash Flows

• Measures discretionary cash flow remaining for operating activities available to use to expand operations, reduce debt, go after new opportunities, or pay additional dividends, amoung other alternatives

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Prepare the operating activities section using the direct method

• Details cash receipts and payments

• Similar to indirect method

• Adjusts statement of income from accrual basis to cash basis in order to arrive at net cash provided by operating activities

• Indirect adjusts total net income.

• Direct adjusts individual revenue and expense item in the statement of income

 

Cash Receipts from Customers

• The relationship between cash receipts from customers, revenues from sales, and changes in accounts receivable and deferred reveue is

 

 

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• If other cash receipts, these must be adjusted for any receivable amounts as was done above

 

Cash payments to suppliers

• The relationship between cash payments to suppliers, COGS, changes in inventory, and changes in accounts payble:

 

 

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Cash payments for other operating expenses

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Cash payments for income tax

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