investment decisions summary Y2Q1
chapter 3 financial statements and ratio analysis
3.1 stockholders report
companies prepare reports for regulators, creditors, owners, and management.
the guidelines they use are generally accepted accounting principles (GAAP).
- financial accounting standards board (FASB); authorizes these principles.
- public company accounting oversight board (PCAOB); not for profit organisation to
protect interest of investors and further the public interest in preperation of
informative, fair and independent audit reports.
- securities and exchange commission (SEC); federal regulatory body that governs the
sale and listening of securities. They require publicy owned corporations with more
than 5 million in assets and more stockholders to provide stockholders report.
- stockholders report; summarizes and documents the firms financial activities during
the past year.
begins with letter to stockholder; primary communication from management in annual report.
four key financial statements
income statement; provides financial summary of firms operating results during a specified
period, meestal 1 kwart of jaar. may not align with calendar year. publice them internally.
- operating profits; what company earned from producing and selling products before
deducting any costs related to debt financing and taxes.
- earnings available for common stockholders; amount earned by firm on behalf of
common stockholders.
- earnings per share (EPS); the number of dollars earned during the period on behalf
of each outstanding share of common stock. net profit after taxes / number of
shares.
actual pay outs; Dividend x number shares.
,net profit after taxes - actual payouts = addition to retained earnings.
companies are not required to pay dividend to stockholders, they can also invest.
balance sheet; summary of statements of the firms financial position at a given point in time.
accumulated depreciation is a contra asset.
als er geen dividend wordt betaald, dan gaan retained earnings omhoog.
paying all money in dividend → short term notes omhoog
- item is liquid if the item is easy to convert into cash quickly without much loss in value
- lists from the most liquid cash down to the least
- the value of the item on the balance sheet is book value.
- common stock entry is par value. par value; arbitrary number of assigned to shares
of stock when they are first created. not related to price investors pay.
- paid in capital in excess of par; amount of proceeds in excess of par value received
from original sale of common stock.
- retained earning; total of all earnings, net of dividends, that have been retained and
reinvested in the firm since its inception.
journal entry;
liabilities decreasing; put at debit
assets decreasing; put at credit side
statement of retained earnings; abbreviated form of statement of SE
statement of SE; all equity account transactions that occurred during a given year.
,statement of retained earnings; net income earned during year, and any cash dividends
paid, with the change in retained earnings between the start and end of that year.
net increase for company; 231-108=
Statement of cash flows; summary of cash flows over the period. summary of the firms
operating, investment, and financing cash flows and reconciles them with changes in its
cash and marketable securities during the period.
notes to the financial statements; explanatory notes keyed to relevant accounts in the
statements; detailed info on the accounting policies, procedures, calculations, and
transactions underlying entries in the financial statements.
- since sarbanes oxley, also details about compliance with that law
- prof securities use this data to develop estimates of the value of securities that the
firm issues, which influence actions of investors.
consolidating international financial statements
financial accounting standards board (FASB) standard no52; mandates that US companies
translate their foreign-currenct-denominated assets and liabilities into us dollars for
consolidation with the parent companys financial statements.
, - technique called for this; current rate (translation) method; under which all us parent
companies foreign-currency denominated assets and liabilities are converted into
dollars values using the exchange rate prevailing at the fiscal year ending date.
3.2 using financial ratios
ratio analysis; involves methods of calculating and interpreting financial ratios to analyze and
monitor the firms performance.
- basic requirements are IS and BS
- interested people; shareholders, creditors, firms management
- both present and prospective shareholders are interested in level of risk of return,
influences price. and in profitability of firm.
type of ratios;
- interpretation is most important, the comparison between other ratios
financial ratios;
cross-sectional analysis; comparison of different firms financial ratios at the same point in
time; involves comparing the firms ratios with those of other firms ratios with those of other
firms in its industry or with industry averages.
- benchmarking; type of CS analysis; firms ratio values are compared with those of a
key competitor or with a group of competitors that it wishes to emulate.
- ratio analysis on its own is probably most useful in highlighting areas for further
investigation
time-series analysis; Evaluation of the firm’s financial performance over time using financial
ratio analysis.
Combined Analysis; Combines cross-sectional and time-series analyses
cautions about using ratio analysis;
1. Ratios that reveal large deviations from the norm merely indicate the possibility of a
problem
2. A single ratio does not generally provide sufficient information from which to judge
the overall performance of the firm
3. The ratios being compared should be calculated using financial statements dated at
the same point in time during the year
4. It is preferable to use audited financial statements
5. The financial data being compared should have been developed in the same way
6. Results can be distorted by inflation
five categories of ratios;
- liquidity, activity, debt, profitability, and market ratios
3.3 liquidity ratios
Liquidity; A firm’s ability to satisfy its short-term obligations as they come due
- easier to pay bills and less likely to become insolvent
- large firms kunnen makkelijker lenen bij bank, dus is liquidity minder belangrijk
- firm that is riskier than others in the industry, requires more liquidity.
- industry with competitive dynamics need more liquidity to make plotselinge
