CHAPTER CHAPTER 14 14 Analyzing Financial Statements: A Managerial Perspective Slide 14-2 Why Why Managers Managers Analyze Analyze Financial Financial Statements Statements Managers analyze financial statements for a variety of reasons including: To control operations To assess the financial stability of vendors, customers, and other business partners To assess how their companies appear to investors and creditors Learning objective 1: Explain why managers analyze financial statements and perform horizontal Slide 14-3 and vertical analyses of the balance sheet and the income statement Control Control of of Operations Operations Managers analyze financial statements to gain insight into whether their goals have been achieved or plans implemented successfully Managers expect that a successful implementation of their plans will be reflected in financial information If financial information is inconsistent with a successful implementation an investigation will be launched Learning objective 1: Explain why managers analyze financial statements and perform horizontal Slide 14-4 and vertical analyses of the balance sheet and the income statement Assessment Assessment of of Vendors, Vendors, Customers, Customers, and and Other Other Partners Partners Another important reason for analyzing financial statements is to review the financial stability of vendors, customers, and other strategic partners Increasingly companies are establishing strong relationships with a small number of vendors willing to commit to high quality levels and short lead times Learning objective 1: Explain why managers analyze financial statements and perform horizontal Slide 14-5 and vertical analyses of the balance sheet and the income statement Assessment Assessment of of Vendors, Vendors, Customers, Customers, and and Other Other Partners Partners Managers want to be confident that the vendor will be stable and continue in existence over the foreseeable future Companies analyze customers to assess whether they will be able to pay the amounts they owe Companies not want to enter into partnerships with firms in financial difficulty Learning objective 1: Explain why managers analyze financial statements and perform horizontal Slide 14-6 and vertical analyses of the balance sheet and the income statement Assessment Assessment of of Appearance Appearance to to Investors Investors and and Creditors Creditors Investors and creditors carefully analyze a company’s financial statements Managers should anticipate how their financial information will appear to stakeholders Managers can explain differences in the notes to the financial statements, or avoid transactions which cause differences Learning objective 1: Explain why managers analyze financial statements and perform horizontal Slide 14-7 and vertical analyses of the balance sheet and the income statement Test Your Knowledge Why managers analyze financial statements? a b c d To control operations To assess vendors, customers and other business partners To assess appearance to investors and creditors All of the above Answer: d All of the above Learning objective 1: Explain why managers analyze financial statements and perform horizontal Slide 14-8 and vertical analyses of the balance sheet and the income statement Horizontal Horizontal and and Vertical Vertical Analyses Analyses Horizontal analysis Analysis of the dollar value and percentage changes in financial statement amounts across time The dollar value of the change is the new value minus the old value for each financial statement amount The percentage change is the dollar value of the change divided by the old value for each financial statement amount Learning objective 1: Explain why managers analyze financial statements and perform horizontal Slide 14-9 and vertical analyses of the balance sheet and the income statement Horizontal Horizontal and and Vertical Vertical Analyses Analyses Vertical analysis Also called common size analysis Analyze financial statement amounts in comparison to a base amount Divide each financial statement amount by total assets for the balance sheet Divide each financial statement amount by net sales for the income statement Learning objective 1: Explain why managers analyze financial statements and perform horizontal Slide 14-10 and vertical analyses of the balance sheet and the income statement Profitability Profitability Ratios Ratios for for HGWn HGWn Slide 14-36 Learning objective 3: Calculate and interpret profitability ratios, turnover ratios, and debt-related ratios Turnover Turnover Ratios Ratios Asset turnover Shows how efficiently assets are used to generate sales Accounts receivable turnover The more times accounts receivable turn over, the sooner they are collected Days’ sales in receivables Slide 14-37 A measure of how long it will take to collect receivables Learning objective 3: Calculate and interpret profitability ratios, turnover ratios, and debt-related ratios Turnover Turnover Ratios Ratios Inventory turnover Indicates how many times inventory turns over Generally, the higher the ratio, the more efficient the management of inventory levels Days’ sales in inventory Slide 14-38 A measure of how long it will take to sell inventory Learning objective 3: Calculate and interpret profitability ratios, turnover ratios, and debt-related ratios Turnover Turnover Ratio Ratio Formulas Formulas Slide 14-39 Learning objective 3: Calculate and interpret profitability ratios, turnover ratios, and debt-related ratios Turnover Turnover Ratio Ratio Formulas Formulas Slide 14-40 Learning objective 3: Calculate and interpret profitability ratios, turnover ratios, and debt-related ratios Turnover Turnover Ratios Ratios for for HGW HGW Slide 14-41 Learning objective 3: Calculate and interpret profitability ratios, turnover ratios, and debt-related ratios Test Your Knowledge The efficient use of assets is indicated by: a b c d Turnover ratios Debt-related ratios The ratio of debt to equity The ratio of current assets to current liabilities Answer: a Turnover ratios Slide 14-42 Learning objective 3: Calculate and interpret profitability ratios, turnover ratios, and debt-related ratios Debt-Related Debt-Related Ratios Ratios Current ratio A measure of a company’s ability to pay short term obligations Acid test ratio (quick ratio) Compared to the current ratio, a more stringent test of a company’s ability to pay short term obligations Slide 14-43 Learning objective 3: Calculate and interpret profitability ratios, turnover ratios, and debt-related ratios Debt-Related Debt-Related Ratios Ratios Debt to equity ratio A measure of the relative amount of debt versus equity in a firm’s capital structure Firms with relatively high values may have too much debt Times interest earned Slide 14-44 A measure of a company’s ability to make interest payments on its debt Learning objective 3: Calculate and interpret profitability ratios, turnover ratios, and debt-related ratios Debt-Related Debt-Related Ratios Ratios Slide 14-45 Learning objective 3: Calculate and interpret profitability ratios, turnover ratios, and debt-related ratios Debt-Related Debt-Related Ratios Ratios for for HGW HGW Slide 14-46 Learning objective 3: Calculate and interpret profitability ratios, turnover ratios, and debt-related ratios Too Too Much Much Debt Debt Slide 14-47 Learning objective 3: Calculate and interpret profitability ratios, turnover ratios, and debt-related ratios Test Your Knowledge The ratio times interest earned can be used to evaluate: a b c d The amount of debt versus equity financing The extent to which interest income exceeds interest expense The extent to which interest expense exceeds interest income The likelihood that a company will be able to make required interest payments Answer: d The likelihood that a company will be able to make required interest payments Slide 14-48 Learning objective 3: Calculate and interpret profitability ratios, turnover ratios, and debt-related ratios Strategic Strategic Partners Partners Slide 14-49 Learning objective 3: Calculate and interpret profitability ratios, turnover ratios, and debt-related ratios Copyright Copyright © 2016 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein Slide 14-50 .. .CHAPTER CHAPTER 14 14 Analyzing Financial Statements: A Managerial Perspective Slide 14- 2 Why Why Managers Managers Analyze Analyze Financial... Learning objective 1: Explain why managers analyze financial statements and perform horizontal Slide 14- 14 and vertical analyses of the balance sheet and the income statement Vertical Vertical Analysis... statements and perform horizontal Slide 14- 21 and vertical analyses of the balance sheet and the income statement Earnings Earnings Management Management Accounting earnings can be manipulated