Kế toán, kiểm toán - Chapter 3: Fundamental interpretations made from financial statement data

CHAPTER 3FUNDAMENTAL INTERPRETATIONS MADE FROM FINANCIAL STATEMENT DATAMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning ObjectivesWhy are financial statement ratios important?How is return on investment calculated and why is it important?What is the DuPont model and what do margin and turnover mean?What is the significance of return on equity and how is it calculated?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning ObjectivesWhat does liquidity mean and why is it important?How are working capital, current ratio, and acid-test ratio calculated and why are they significant?How can trend analysis be used most effectively?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 1Why are financial statement ratios important?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Financial Ratios and Trend AnalysisA ratio is the relationship between two numbersRatios are useful for comparing different sized firmsAverage ratios for an industry are useful for comparisonsA trend is comparing ratios over several time periodsTrend analysis provides are more meaningful comparisonsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 2How is return on investment calculated and why is it important?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Return on Investment CalculationsRate of return = Amount of return / Amount of investmentReturn on investment is a measure of profitabilityDerived from the interest calculation of: Interest = Principal x Rate x TimeMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Return on Investment and RiskIn evaluating investments, risk must also be consideredRisk relates to the range of outcomes from an activity; wider range = greater riskIn general, higher risk = higher returnMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Financial Statements and Return on InvestmentAlso called Return on AssetsThe amount of return = Net IncomeThe amount of the investment = Average Total AssetsDescribes the rate of return management was able to earn on the assets available to use during the yearMay also be calculated as Operating Income / Average Operating AssetsMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 3What is the DuPont model and what do margin and turnover mean?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002The DuPont ModelAn expansion of the basic return on investment calculationReturn on Investment =Net Income x Sales Sales Average Total AssetsNet Income / Sales = MarginSales / Average Total Assets = Asset TurnoverMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Margin and Asset TurnoverMargin indicates that some sales revenues must result in net income if the firm is to be profitableTurnover indicates how efficiently the firm is using its assets to generate revenueMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 4 What is the significance of return on equity and how is it calculated?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Return on EquityReturn on Equity is a special case application of the rate of return conceptReturn on Equity = Net Income Average Owners’ EquityMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 5What does liquidity mean and why is it important?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Working Capital and Measures of LiquidityLiquidity is the firm’s ability to meet its current obligationsWorking capital is the excess of a firm’s current assets over its current liabilitiesCurrent assets are cash and other assets likely to be converted to cash within a yearCurrent liabilities are those obligations expected to be paid within a yearMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Measures of LiquidityWorking Capital = Current Assets less Current LiabilitiesCurrent Ratio = Current Assets divided by Current LiabilitiesAcid-Test Ratio = Cash and Accounts Receivable divided by Current LiabilitiesMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 6How are working capital, current ratio, and acid-test ratio calculated and why are they significant?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Current RatioThe trend in the current ratio is the most useful in judging a firm’s current bill-paying abilityAs a general rule, a current ratio of 2.0 is considered adequateThe higher the current ratio, the better – up to a pointMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Acid-Test RatioAlso known as the Quick RatioThe Acid-Test Ratio is a more conservative measure of liquidity since inventory is not included in its calculationAs a general rule, an Acid-Test Ratio of 1.0 is considered adequateMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Learning Objective 7How can trend analysis be used most effectively?McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Trend AnalysisGraph return against the year, with the years listed on the horizontal axisThe more compressed the graph, the more pronounced the peaks and valleysSee following graph of margin and turnover for Intel CorporationMcGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002Intel CorporationMargin and Turnover, 1995 - 1999McGraw-Hill/Irwin©The McGraw-Hill Companies, Inc., 2002