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charpter-ratio analysis
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0% found this document useful (0 votes)
188 views17 pagesChapter 3
charpter-ratio analysis
Uploaded by
Anahisa QuintanillaCopyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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/ 17
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SOeVEENIAY dhe
khalidabdelazim@gmail.com Chapter 3
FORO RHO RIOR RIOR IIR HR IOI
Sy sla il gall Sats yy all OOS oe ees Sar Line May oye cpa fe
Sources and Uses _Gtslaiiw'\ 9 jstuaalt
Sources of cash : A firm’s activities that generate (or bring) cash. (Cash inflow)
Decrease in asset accounts & Increase in liability or equity account.
(GSks Ga BAS ) AN (ss gh) als NS SN A ga: Aga alias
ASL Sia gl aguas) hla Bik slly © eee ohh i yall
Uses (or applications) of cash: A firm’s activities that involve spending cash.(Cash outflow)
Increase in asset accounts & Decrease in liability or equity accounts.
(GIS gS BS) . As Ga gle os glad a AS AN Aba) ey Ayah (caYLandad gf ) cabaladaud
ASL gla gi ppundll bbe (23 Gallly © gue Glue boo jl
P.(9) Based only on the following information for Sweeney Corp., did cash go up or down?
By how much? Classify each event as a source or use of cash.
Decrease in inventory $375 Decrease in accounts payable 190
Increase in notes payable 210 Increase in accounts receivable 105
ApH pladaut gh jaca oan OS Gs 9,8; Seuss ah Cand of ASG Jo ald AMUN ils gleall gle oly
105 Gairall Ba «© 210 aba Bly shdaky © 190 cetlall Galt 6 375 Gs jAall Galisl
Solution ;
Decrease in inventory is a source of cash
Decrease in accounts payable is a use of cash
Increase in notes payable is a source of cash
Increase in accounts receivable is a use of cash
Changes in cash = sources — uses
= 375-190+ 210-105 = 290
Cash increased by 290
P.(11) For the year just ended, Wallin Frozen Yogurt shows an increase in its net fixed
assets account of $835. The company took $148 in depreciation expense for the
year. How much did Wallin spend on new fixed assets? Is this a source or use of
cash?
$835 alae: GH Gyuatl pie Ghee gi Subj sel "al Suen GUI «gl Lesill dual
Soarall KAN gual) 54S yA BEN AS Lull ADL) las GHG 148 4S pill cota gs,
SAGEM paddy) reene fhe Ua
Solution :
Net investment in FA = = NFA end — NFA tice ) + Depreciation
835 + 148 = 983
This is a use of cash.
: é a5
(Khalidabdelazim@gmaileom — +8+\EEXYA% lys — paialye a: ske|) Q. A firm has the following current account values. What effect did the change in net
working capital have on the firm's cash flows for 2009?
ABI cles teas Sata GaN Gh piles (2B ast 85 ge Le Aa a pista) Aba ad ual AS 8
£2009 plal ds ail 4ysah
2008 2009
Cash $ 87 $112
accounts receivable 309 321
inventory 919 868
accounts payable 617 714
A. net use of cash of $37 B. net use of cash of $83 C. net source of cash of $83
D. net source of cash of $111 _ E. net source of cash of $135
Solution : (D)
Net source of cash = - 25 - 12 +51+ 97=$111
Statement of Cash Flows 4-3 ailédsih Lait
Is financial statement that summarizes its sources and uses of cash over a specified period.
Is financial statement that explain reasons the change in the cash balance by the knowledge of
the impact of operating activities, investment, and finance on the movement of cash during a
certain period of time .
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cle Gages | SURLY y « GA A 8h Apes Ge Ge Asli) ae gb oH hah eae gs Alle Lath
Fine Lie 5 5 pd OS Asi 4S a
Changes divided into three major categories:
(1) Operating Activity : includes, net income, Depreciation and changes in current accounts
(except cash , Short-term investments, Short-term borrowings & Notes Payable)
(2) Investment Activity : includes, change in Total fixed assets.
(3) Financing Activity : includes, changes in Short-term investments , notes payable, Short-
term borrowings, long-term debt, and equity accounts (except retained earnings ) as well
as dividends .
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(abst SLualy « Ga) Syne Gag ily « Ga Yt Eyal
(CADWY + AEH geet cite ced sll gh) GWU Gyuet olla of stl Judy 2 lati buds
Cogelly Sa) 5 yma ga g sly « aia Gly ghy « GaN 5 ped A LSA gi ol stl Jay : bs paill bLas
Fe Spall CLIN lt GLEYG (bjateall CLUY) labs ) Usb) bbe s Ja) dig
: é a5
(Khalidabdelazim@gmaileom — +8+\EEXYA% lys — paialye a: ske|) Example:
Balance Sheet ($ in Millions )
Income Statement 2009
Cash
AR
Inventory
Other CA
Total CA
Net FA
Total Assets
2009
696
956
301
303_
2,256
3.138
2008
58
992
361
264
1,675
3,358
5394
5,033
AP
/P
Other CL
Total CL
LT Debt
C/S (Common Stock)
Total Liab.& Equity
There are 190.9 million shares outstanding.
prepare an Statement of Cash Flows
2009 | 2008 Revenues 5,000
307 | 303 ©) Cost of Goods Sold | 2,006
26 119 (-) Expenses 1,740
1.662 | 1,353 ) Depreciation 116_
1,995 | 1,775 EBIT 1,138
843 | 1,091 ©) Interest Expense 7
2,556 | 2,167 Taxable Income 1,131
5,394 | 5,033 © Taxes 42
Net Income
EPS 3.61
Dividends per share 1.08
Statement of Cash Flows 2009 (§ in Millions )
Cash, beginning of year a ly Las 58
Operating Activity : pauiat busi
Net Income sal giles 689
Plus: Depreciation Day + cla; 116
Decrease in A/R syed 3 Gadi 36
Decrease in Inventory 3 Ral 3 Galil 60
Increase in A/P Go sthl 64 5a hh 4
Increase in Other CL GAY! Asli & (8 52 3M 309
Less: Increase in other CA GAY) 4 slaiall Ugo) i bab SM: quads 39
Net Cash from Operations bell gy Ayal ile 1175
Investment Activity : 2 et bus
Sale of Fixed Assets A Sguel ae 104
Net Cash from Investments SA LAY ye Aaah ile 104
Financing Activit da geil bLSs
Decrease in Notes Payable ats Bs) eb call -93
Decrease in LT Debt al dpb oss 4 ell -248
Decrease in C/S (minus RE) Fuslall gu! Ged Gail “94
Dividends Paid de saat de spall cL YI =206
Net Cash from Financing a saill Cys Apatite 641
Net Increase in Cash Ags Bats jN Sle 638
Cash, End of Year Fad Ags Aas 696
Notes :
1- Change in total fixed assets = - 220 + Depreciation 116 = -104
2- Dividends paid = 190.9 = 1.08 = 206
3- Change in Common Stock C/S :
Additions to RE = 689 —206 = 483 3 jatnall cl DU Ged)
Change in C/S = 2556 — 2167 — 483 = -94
ask
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3 jatl CLM cb till ol Guay ¢ B jatnll cl YY Cpanel aidll fhe (yb olin $8 9 « (common Stock) Aol)
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: é a5
(Khalidabdelazim@gmaileom — +8+\EEXYA% lys — paialye a: ske|) Standardized statements make it easier to compare financial information, particularly as the
company grows.Also, They are also useful for comparing companies of different sizes,
particularly within the same industry.
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Aetiall jail Joi Lola uns ll pleat) GIS GIS All Ga
(1) Common-Size Statements (Vertical Analysis) Comigh dutaall ) Syitall apa ait sb
A standardized financial statements presenting all items in percentage terms. Balance sheet
items are shown as a percentage of assets and income statement items as a percentage of sales.
(A) Common-Size Balance Sheets : Compute all accounts as a percent of total assets.
(B ) Common-Size Income Statements : Compute all line items as a percent of sales
Cot Magia aS Aaa gal Ah jul gi Coa ey Agi Laat Lge (ne tll asa pl A lus LN al
Sazeall (ya Aaghe Aus Saal) Lad a gh
gah glleal ye dy sto Anais Gi baall JS Guus: Ayia
0
salle dasa ais 9 gill JS Cua: ej pa Bt)
Coy Sota ¢ aT Sota AS jute jill ORE
A standardized financial statement presenting each item relative to the base-year value of that
item. Select a base year and then express each item relative to the base-year value of that item.
This is useful for picking up trends through time.
= Ges Aa gd sil Pa Aad (oll Ayatlly aby US path A hes Alls Lad
CAS yee SUNY ean gb he UB y ula Aina ot NT Hh gh QM ab SS aa Ge ya Bo ul) Ais gaat
3) Combined Common-Size and Base-Year Analysis:
AS siall Guituitt Ais g i cisiall anol Guus aaall Jules
Express each item in base year as a percent of either total assets or sales. Then, compare each
subsequent year’s common-size percent to the base-year percent (abstracts from the growth in
assets and sales).
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(Slagally gual gb gaill Lae ) pl Ais (gf Ay gall Lully A ha apall Gye diy
Example:
The following are the balance sheet and income statement of one of the companies :
Balance Sheet ($ in Millions )
2008 2009
Cash 84 98
A/R (Accounts receivable) 165 188
Inventory 393 422
Total CA 642 708
Net plant and equipment 2731 2880
Total assets 3373 3588
A/P (Accounts payable) 312 344
N’P (Notes payable) 231 196
Total CL 543 540
Long-term debt 531 457
Common stock and paid-in surplus. 500 550
Retained earnings 1799 2041,
2299 2591
Total liabilities and owners’ equity 3373 3588
: é a5
(Khalidabdelazim@gmaileom — +8+\EEXYA% lys — paialye a: ske|) Income Statement 2009 ($ in Millions )
Sales 2311
Cost of Goods Sold 1344
Depreciation 276
Earnings before interest and taxes 691
Interest paid 141
Taxable Income 350
Taxes (34%) 187
Net Income 363
Dividends 121
Addition to retained earnings 242
(1) Prepare the 2009 common-size Income Statement.
(2) Prepare the 2008 and 2009 common-size balance sheets.
(3) Prepare the 2009 common-— base year balance sheet
(4) Prepare the 2009 combined common-size, common-base year balance sheet
Solution :
common-size Income Statement 2009
Sales
Cost of Goods Sold
Depreciation
Earnings before interest and taxes
Interest paid
Taxable Income
Taxes (34%)
Net Income
Dividends 5.2%
Addition to retained earnings 10.5 %
100 %
58.2%
11.9%
29.9 %
6.1%
23.8 %
8.1%
15.7%
Solution (2) Solution Solution
2008 2009 2008 2009 (3) (4)
Current assets
Cash 84 98 2.5% 2.7% 117 1.08
Accounts receivable 165 188 4.9% 5.2% 1.14 1.06
Inventory 393 422 11.7% 11.8 % 1.07 1.01
Total CA 642 708 19.1% | 19.7% 1.10 1.03
Fixed assets
Net plant and equipment 2.731 2,880 | 80.9% | 80.3 % 1.05 0.99
Total assets 3,373 | 3.588 | 100% 100 % 1.06 1.00
Current Liabilities
Accounts payable 312 344 9.2 % 9.6 % 1.10 1.04
Notes payable 231 196 6.8 % 5.5% 0.85 O81
Total CL, 543 540 16 % 15.1% 0.99 0.94
Long-term Liabilities
Long-term debt 531 457 15.7% | 12.7% 0.86 0.81
Owners” Equity
Common stock and paid-in surplus 500 550 14.8 % 15.3 % 1.10 1.03
Retained earnings 1,799 | 2,041 | 53.3% | 56.9% 1.13 1.07
Total OE 2,299 | 2,591 | 681% | 72.2% 1.13 1.06
Total liabilities and owners’ equity 3.373 3,588 100 %% 100 % 1.06 1.00
° As
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Sewy dia
(Khalidabdelazim@gmail.com — ++ £E0VA9 diga — pplaliue als : she} )
ig Saal tha Questions From previous exams
(1) Increases in a accounts receivable are considered : 1 peat Ladd) ell 24 Sate 3M
(a) Depreciation (b) Cash inflow (c) Cash outflow — (d) Losses
Solution : (Cc)
c28 GS gis
(2) Areduction in the inventory is a: 1 Os JAA gd pst
(a) Use of Cash. (b) Source of cash (c) Depreciation
Solution : (B)
4G jas
(3) Increase in net fixed assets is a:
a) Depreciation b) Source of cash c) Use of cash
Solution: (Cc)
(4) The increase in accounts payable is considered:
a) Cash outflow b) Cash inflow ©) Losses
Solution: (B)
(5) The components of the cash flow statement are: got Ayal tds) Lat Ga Ss
a) Operating cash flow, capital structure and change in net working capital
b) Operating activities, financing activities and investment activities
c) Cash flow from assets, cash flow to creditors and cash flow to stockholder
Solution: (B)
(6) Common-size balance sheets : 13) fide pans Aye geal bp juall
(a) Compute all line items as a percent of sales .
(b) Compute all accounts as a percent of total assets.
(c) Compute all accounts as a percent of last year total assets.
(d) Deals with all accounts in the balance sheet with equal size.
Solution : (B)
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(7) To create a common size income statement .........00.... all items on the income
statement by ..............0..
ba one GSA Last (98 9 gill aya Sl fitia pas Ss Lill ebay
(a) multiply; net income (b) multiply; total revenue
(c) divide; net income (d) divide; total revenue
Solution : (D)
WINN ellen « aac
: é a5
(Khalidabdelazim@gmaileom — +8+\EEXYA% lys — paialye a: ske|) (8) The wo... items are calculated by dividing each item by the total assets .
Opal gllan) le oy JS Lands Llu ay
(a) common size income statement
(b) common base year
(c) common size balance sheet
Solution : (Cc)
Q.. A firm has sales of $2,190, net income of $174, net fixed assets of $1,600, and current
assets of $720. The firm has $310 in inventory. What is the common-size statement
value of inventory? GABE ppall Lath oy jal ad gt be
A. 13.36 % B. 14.16 % C. 19.38 % D. 30.42 % E. 43.06 %
Solution : (A)
Common-size inventory = 310 / (1600 + 720) = 13.36 %
Q. A firm has sales of $3,400, net income of $390, total assets of $4,500, and total equity of
$2,750. Interest expense is $40, What is the common-size statement value of the interest
expense? Sal ual aaah Lastly Basted) ay pune Lad pa be
A. 0.89 % B. 1.18 % C. 3.69 % D. 10.26 % E. 14.55 %
Solution : (B)
Common-size interest = 40 / 3400 = 1.18 %
Q.. Last year, which is used as the base year, a firm had cash of $52, accounts receivable of
$218, inventory of $509, and net fixed assets of $1,107. This year, the firm has cash of
$61, accounts receivable of $198, inventory of $527, and net fixed assets of $1,216.
What is the common-base year value of accounts receivable?
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