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Review of Financial Statements and Ratios

I. Basic Financial Statements

A. Income Statement - summary of firm’s accounting revenues, expenses, and profits over some time period

Ex. => see Consolidated Statements of Income for Dell Inc. from the 10-k filed with SEC for fiscal 2005

B. Balance Sheet - summary of accounting values of a firm’s assets and claims against those assets

Ex. => see Consolidated Statements of Financial Position for Dell Inc. from the 10-k for fiscal 2005

II. Standardized Financial Statements

1. Common-size balance sheets

=> compute all accounts as a percent of total assets

2. Common-size income statements

=> compute all line items as a percent of sales

Uses for common size …show more content…

Dell (2005) = 4461/16 = 278.81
EBIT = 3043 + 16 + 1402 = 4461

Dell (2004) = 3738/14 = 267.00
EBIT = 2645 + 14 + 1079 = 3738

Notes:

1) high and/or increasing ratio indicates: strong ability to make interest payments with earnings
2) also called interest coverage ratio

3. Cash Coverage ($CR) = (EBIT+Depr)/IE

where: Depr = depreciation

Ex.

Dell (2005) = (4461+334)/16 = 299.69
Dell (2004) = (3738+263)/14 = 285.79

Note: high and/or increasing ratio indicates: strong ability to pay interest with cash (and pay interest with cash not earnings).

General note on long-term solvency ratios: low debt ratio and high coverage may indicate too little use of debt

F. Asset Management, or Turnover, Ratios

=> indicate how efficiently generate sales with assets

1. Inventory Turnover (IT) = COGS / I

where: COGS = cost of goods sold

Ex.

Dell (2005) = 40,190/459 = 87.56
Dell (2004) = 33,892/327 = 103.65

Notes:

1) high and/or increasing turnover indicates: efficient inventory management since have turned over (sold) inventory many times during year alternatively: had high/increasing sales per dollar of inventory

2) too high may indicate risk of stock-outs and lost sales

2. Days’ Sales in Inventory (DSI) = 365 / IT

Ex.

Dell (2005) = 365/87.56 = 4.17
Dell (2004) = 365/103.64 = 3.52

Note: low and/or falling ratio indicates that: on average it doesn’t take long to sell

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