03 04 Analysis Financial Statement

Understanding Financial Statements and Cash Flows &Evaluating a Firm’s Financial Performance AFS-1 Learning Objectives 1. Describe the content of the four basic financial statements and discuss the importance of financial statement analysis to the financial manager. 2. Evaluate firm profitability using the income statement. 3. Explain what we can learn by analyzing a firm’s financial statements. AFS-2 Learning Objectives 4. Use common size financial statements as a tool of financial analysis. 5. Calculate and use a comprehensive set of financial ratios to evaluate a company’s performance. 6. Select an appropriate benchmark for use in performing a financial ratio analysis. 7. Describe the limitations of financial ratio analysis. AFS-3 Principles Used in this Chapter • Principle 1: Money has a Time Value. – Financial statements typically ignore time value of money. Thus financial managers and accountants may view financial statements very differently. AFS-4 The analysts can use such information to infer the risk-return tradeoff in a firm. AFS-5 .Principles Used in this Chapter (cont.) • Principle 2: There Is a Risk-Return Tradeoff. – Financial statement analysis can yield important information about the strengths and weaknesses of a firm’s financial condition. ) • Principle 3: Cash Flows Are the Source of Value. – We should distinguish between reported earnings and cash flow. – Financial statements provide an important starting point in determining the firm’s cash flow.Principles Used in This Chapter (cont. – An important use of a firm’s financial statements involves analyzing past performance as a tool for predicting future cash flows. It is possible for a firm to report positive earnings but have no cash! AFS-6 . ) • Principle 4: Market Prices Reflect Information.Principles Used in This Chapter (cont. the market prices. – Firm’s financial statements provide important information that is used by investors in forming expectations about firm’s future prospects and subsequently. which is important to the valuation of the firm. AFS-7 . – Financial statement analysis requires gathering information about a firm’s financial condition. An Overview of the Firm’s Financial Statements Copyright © 2011 Pearson Prentice Hall. All rights reserved. . 4. 2. 3. Income statement Balance sheet Cash flow statement Statement of shareholder’s equity AFS-9 .Basic Financial Statements • Following four types of financial statements are mandated by the accounting and financial regulatory authorities: 1. • Expenses. Income Statement: – An income statement provides the following information for a specific period of time (for example. and • Profit.) • 1. AFS-10 . a year or 6 months or 3 months): • Revenue.Basic Financial Statements (cont. as of December 31. 2010) • Assets (value of what the firm owns). Balance sheet: – Balance sheet provides a snap shot of the following on a specific date (for example.) • 2. and • Shareholder’s equity (the money invested by the company owners). • Liabilities (value of firm’s debts).Basic Financial Statements (cont. AFS-11 . Basic Financial Statements (cont. Cash flow statement: – It reports cash received and cash spent by the firm over a period of time (for example. AFS-12 . over the last 6 months).) • 3. and Changes to owner’s equity. AFS-13 .Basic Financial Statements (cont. Retained earnings account.) • 4. Preferred stock account. last six months): • • • • Common stock account. Statement of shareholder’s equity: – It provides a detailed account of the firm’s activities in the following accounts over a period of time (for example. Why Study Financial Statements? • Analyzing a firm’s financial statement can help managers carry out three important tasks: 1. Forecast future performance. Assess current performance through financial statement analysis. 2. Monitor and control operations. and 3. AFS-14 . ) 1. – Chapter 4 introduces the tools and techniques used to carry out financial statement analysis. AFS-15 .Why Study Financial Statements? (cont. Financial statement analysis: – Financial statement analysis allows us to assess the present financial condition of a firm. creditors) to monitor and control the firm’s operations. board of directors) and outsiders (such as suppliers. a creditor may analyze a firm’s financial statements to decide whether or not to renew company’s loan.Why Study Financial Statements? (cont.) 2. Financial control: – Financial statements are used by both insiders (such as managers. AFS-16 . – For example. Why Study Financial Statements? (cont.) 3. Financial forecasting and planning: – Financial planning models are typically built using the financial statements. AFS-17 . – Financial planning is covered in chapter 17. The matching principle. and 3.What are the Accounting Principles Used to Prepare Financial Statements? • The following three fundamental principles are adhered to by accountants when preparing financial statements: 1. The historical cost principle. • An understanding of these basic principles allows us to be a more informed user of financial statements. 2. AFS-18 . The revenue recognition principle. or The firm has completed what it must do to be entitled to the cash. The revenue recognition principle: – It states that the revenue should be included in the firm’s income statement for the period in which: • • Its goods and services were exchanged for cash or accounts receivable.) 1.What are the Accounting Principles Used to Prepare Financial Statements? (cont. AFS-19 . What are the Accounting Principles Used to Prepare Financial Statements? (cont.) 2. The matching principle: – This principle determines whether specific costs or expenses can be attributed to this period’s revenues. – The expenses are matched with the revenues they helped produce. • For example, employees’ salaries are recognized when the product produced as a result of that work is sold, and not when the wages were paid. AFS-20 What are the Accounting Principles Used to Prepare Financial Statements? (cont.) 3. The historical cost principle: – This principle provides the basis for determining the dollar values the firm reports in its balance sheet. – Most assets and liabilities are reported in the firm’s financial statements at historical cost i.e. the price the firm paid to acquire them. The historical cost generally does not equal the current market value of the assets or liabilities. AFS-21 An Income Statement • An income statement is also called a profit and loss statement. • An income statement measures the amount of profits generated by a firm over a given time period (usually a year or a quarter). Revenues (or Sales) – Expenses = Profits AFS-22 An Income Statement (cont.) • An income statement will contain the following basic elements: 1. Revenues 2. Expenses • Cost of goods sold, Interest expenses, SGA (selling, general and administrative) expense, depreciation expense, Income tax expense 1. Profits • Gross profit, net operating income (also known as EBIT), earnings before taxes (EBT), and net income AFS-23 An Income Statement (cont. EBT = Earnings before taxes.) • Sales – Minus Cost of Goods Sold • = Gross Profit • Minus Operating Expenses – Selling expenses – General and Administrative expenses – Depreciation and Amortization Expense • • • • = Operating income (EBIT) Minus Interest Expense = Earnings before taxes (EBT) Minus Income taxes  EBIT = Earnings before interest and taxes. EAT = Earnings after taxes AFS-24 • = Net income (EAT) . Sample Income Statement AFS-25 . AFS-26 . AFS-27 . Evaluating a Firm’s EPS and Dividends • We can use the income statement to determine the earnings per share (EPS) and dividends. • EPS = Net income÷ Number of shares outstanding AFS-28 Evaluating a Firm’s EPS and Dividends (cont.) • Example 1: A firm reports a net income $90 million and has 35 million shares outstanding, what will be the earnings per share (EPS)? • EPS = Net income ÷ Number of shares = $90 million ÷ $35 million = $2.57 AFS-29 Evaluating a Firm’s EPS and Dividends (cont.) • We can determine the dividends paid by the firm to each shareholder by dividing the total amount of dividend (reported on the income statement) by the total number of shares outstanding. • Dividends per share = Net income ÷ Number of shares AFS-30 Evaluating a Firm’s EPS and Dividends (cont.) • Example 2: A firm reports dividend payment of $20 million on its income statement and has 35 million shares outstanding. What will be the dividends per share? Dividends per share = Net income ÷ Number of shares = $20 million ÷ $35 million = $0.57 AFS-31 and/or 2. Pay dividends to shareholders. Reinvest in the firm AFS-32 .Connecting the Income Statement and the Balance Sheet • What can the firm do with the net income?: 1. How much was retained or reinvested by the firm? • Amount retained = Net Income – Dividends = $90m .) • Example 3: Review examples 1 & 2.Connecting the Income Statement and the Balance Sheet (cont.$20m = $70m • The firm’s balance on retained earnings will increase by $70 million on the balance sheet. AFS-33 . Interpreting Firm Profitability using the Income Statement • What can we learn from H.J. The firm has been profitable as its revenues exceeded its expenses. Boswell Inc.’s income statement (Table 3-1)? 1. AFS-34 . ) 2. The gross profit margin (GPM) = gross profits ÷ sales = $675 million ÷ $2.Interpreting Firm Profitability using the Income Statement (cont.700 million = 25% – GPM indicates the firm’s “mark-up” on its cost of goods sold per dollar of sales. AFS-35 . 17% • The operating profit margin is equal to the ratio of net operating income or EBIT divided by firm’s sales.700 million = 14.) 3. The operating profit margin = net operating income ÷ sales = $382.Interpreting Firm Profitability using the Income Statement (cont.5 million ÷ $2. AFS-36 . Interpreting Firm Profitability using the Income Statement (cont. AFS-37 .75 million ÷ $2.) Net profit margin: = net profits ÷ sales = $204.58% • Net profit margin indicates the percentage of revenues left after all expenses (including interest and taxes) have been considered.700 million = 7. and net profit margin) should be closely monitored and compared to previous years and those of competing firms.) • These profit margins (gross profit margin. AFS-38 . operating profit margin.Interpreting Firm Profitability using the Income Statement (cont. • Managers have an incentive to tamper with reported earnings as their pay depends upon it and investors care about it. AFS-39 . GAAP (Generally Accepted Accounting Principles).GAAP and Earnings Management • While the firms must adhere to set of accounting principles. there is considerable room for managers to influence the firm’s reported earnings. • The balance sheet is defined by the following equation: Total Assets = Total Liabilities + Total Shareholder’s Equity AFS-40 .The Balance Sheet • The balance sheet provides a snapshot of the firm’s financial position on a specific date. AFS-41 .The Balance Sheet (cont. • Total liabilities represent the total amount of money the firm owes its creditors • Total shareholders’ equity refers to the difference in the value of the firm’s total assets and the firm’s total liabilities.) • Total assets represents the resources owned by the firm. ) • In general. • Cash and assets held for sale (such as marketable securities) are an exception to the rule.The Balance Sheet (cont. AFS-42 . These assets are reported using the lower of their cost or current market value. GAAP requires that the firm report assets on its balance sheet using the historical costs. ) • Assets whose value is expected to decline over time (such as equipment) is reported as “net equipment” which is equal to the historical cost minus accumulated depreciation.The Balance Sheet (cont. • Note. AFS-43 . the net value reported on balance sheet could be significantly different from the market value of the asset. The Balance Sheet (cont.) AFS-44 . ) • The balance sheet includes the following main components: 1. long-term liabilities. It includes current assets and fixed assets.Sources of financing – Found on the right-hand side of the balance sheet.The Balance Sheet (cont. 2.Assets – Found on the left-hand side of the balance sheet. It includes current liabilities. AFS-45 . and owner’s equity. ) • Current assets consists of firm’s cash plus other assets the firm expects to convert to cash within 12 months or less.The Balance Sheet (cont. For example. AFS-46 . such as receivables and inventory. • Fixed assets are assets that the firm does not expect to sell within one year. land. plant and equipment. ) • Current liabilities represent the amount that the firm owes to creditors that must be repaid within a period of 12 months or less such as accounts payable. • Long-term liabilities refer to debt with maturities longer than a year such as bank loans.The Balance Sheet (cont. bonds. notes payable. AFS-47 . ) • The stockholder’s equity is broken down into two components: (1) The amount the company received from selling stock to investors. AFS-48 .The Balance Sheet (cont. It may be shown as common stock in the balance sheet or it may be divided into two components: par value and additional paid in capital above par. Paid in capital is the additional amount the firm raised when it sold the shares. Par value is the stated or face value a firm puts on each share of stock. 00 and the firm has 30 million shares outstanding such that the par value of the firm’s common equity is $60 million.The Balance Sheet (cont. If the stocks were issued to investors for $240 million. AFS-49 .) • For example. $180 million represents paid in capital. DLK corporation’s par value per share is $2. e.The Balance Sheet (cont. not paid in dividends) from prior years operations.) • (2) The amount of the firm’s retained earnings. Retained earnings are the portion of net income that has been retained (i. • Thus stockholder’s equity = Par value of common stock + Paid in Capital + Retained Earnings AFS-50 . The Balance Sheet (cont.) • We can also express stockholders’ equity as follows: Shareholders' equity = Total Assets – Total Liabilities AFS-51 . plant and equipment). • For example.Firm Liquidity and Net Working Capital • Liquidity refers to the speed with which an the asset can be converted to cash without loss of value. a firm’s bank account is perfectly liquid. Other types of assets are less liquid as they more difficult to sell and convert to cash such as PPE (property. AFS-52 . Firm Liquidity and Net Working Capital • For the overall firm. liquidity generally refers to the firm’s ability to covert its current assts (accounts receivable and inventories) into cash so that it can pay its bills (current liabilities) on time. • We can thus measure a firm’s liquidity by computing the net working capital = current assets – current liabilities AFS-53 . it is in a good position to pay its debts on time and is consequently very liquid.) • If a firm’s net working capital is significantly positive. • Lenders consider the net working capital as an important indicator of firm’s ability to repay its loans.Firm Liquidity and Net Working Capital (cont. AFS-54 . The Balance Sheet AFS-55 . AFS-56 . AFS-57 . through the sale of equity or retention of prior year’s earnings).Debt and Equity Financing • The right-hand side of the balance sheet reveals the sources of money used to finance the purchase of the firm’s assets listed on the left-hand side of the balance sheet. AFS-58 . • It shows how much was borrowed (debt financing) and how much was provided by firm’s owners (equity financing. • Maturity: Debt matures after a fixed period while equity securities do not mature. AFS-59 . • Seniority: Debt holders are paid before equity holders in the event of bankruptcy.Debt versus Equity • Payment: Payment for debt holders is generally fixed (in the form of interest). Payment for equity holders (dividends) is not fixed nor guaranteed. • The gap between book value and market value is likely to be higher for fixed assets relative to current assets for two reasons: – Inflation affects the market price of asset. and Market Values • Book values (based on historical cost) reported in the balance sheet can differ from market values. AFS-60 . Historical Costs. and – Depreciation adjustments in the balance sheet do not reflect actual changes in market values.Book Values. The Cash Flow Statement • The Cash Flow Statement is used by firms to explain changes in their cash balances over a period of time by identifying all of the sources and uses of cash. AFS-61 . payment of taxes. For example. sale of equipment. For example. • Use of cash is any activity that causes cash to leave the firm.Sources and Uses of Cash • Source of cash is any activity that brings cash into the firm. AFS-62 . Balance Sheet for H.J. AFS-63 . Boswell. Inc. 5m of use of cash to invest in accounts receivable.Accounts receivable increased by $22. AFS-64 . Thus it represents $22.Cash Flow Analysis • Why did the cash balance decline by $4.5 million representing an increase in uncollected cash from credit sales.5 million from 2009 to 2010? 1. Cash Flow Analysis (cont.50 million indicating use of cash to procure inventory.) 2. 3. Inventory increased by $148.50 million indicating use of cash to invest in equipment. – an increase in an asset account = use of cash – a decrease in an asset account = source of cash AFS-65 . In general. Equipment increased by $175. Accounts Payable. Short-term debt decreased by $9 million indicating use of cash to pay off the debt. credit extended to the firm. AFS-66 .75 million indicating a source of cash. 5.Cash Flow Analysis (cont. 6. Long-term debt increased by $51.5million due to accounts payable. increased by $4.5million. Thus source of cash increased by $4.) 4. In general. Retained earnings increased by $159.) 7. – An increase in a liability account = source of cash – A decrease in a liability account = use of cash AFS-67 .Cash Flow Analysis (cont.75 million representing a source of cash to the firm from the firm’s operations. ) • Change in cash balance = Sources of cash – Use of Cash = $216 .50 Uses of Cash Increase in Accounts Receivable $22.Cash Flow Analysis (cont.00 Total Uses of cash = $220.50 AFS-68 .50 = -$4.50 Sources of Cash Increase in Accounts Payable = $4.50 Increase in long-term debt =$51.75 Increase in net plant and equipment = $40.75 Increase in inventory = $148.50 Decrease in short-term notes = $9 Total Sources of cash = $216.50 Increase in retained earnings = $159.$220. 75 million) – The largest use of cash was for acquiring inventory at $148. Boswell’s operations reveals the following for 2010: – The firm used more cash than it generated. resulting in a deficit of $4.5 million.) • An analysis of H.J. AFS-69 .Cash Flow Analysis (cont.5 million – The primary source of cash flow was retained earnings ($159.75 million) followed by long-term debt ($51. Cash Flow Analysis Summary Sources of Cash Decrease in an asset account Increase in a liability account Increase in an owner’s equity account Uses of Cash Increase in an asset account Decrease in a liability account Decrease in an owners’ equity account AFS-70 . Cash Flow Statement • The format for a traditional cash flow statement is as follows: Beginning Cash Balance Plus: Cash Flow from Operating Activities Plus: Cash Flow from Investing Activities Plus: Cash Flow from Financing Activities Equals: Ending Cash Balance AFS-71 . • Investing activities include the cash flows that arise out of the purchase and sale of long-term assets such as plant and equipment. AFS-72 .Cash Flow Statement (cont. Basically any activity that affects net income for the period.) • Operating activities represent the company’s core business including sales and expenses. payment of dividends.Cash Flow Statement (cont.) • Financing activities represent changes in the firm’s use of debt and equity such as issue of new shares. AFS-73 . Statement of Cash Flows AFS-74 . Boswell.H. Inc.J. Interpreting the Statement of Cash Flow You are in your second rotation in the management training program at a regional brokerage firm and your supervisor calls you into her office on Monday morning to discuss your next training rotation. When you enter her office you are surprised to learn that you will be responsible for compiling a financial analysis of Chesapeake Energy Inc. Your boss suggests that you begin your analysis by reviewing the firm’s cash flow statements for 2004 through 2007 (found below): Checkpoint 3. (CHK).3 AFS-75 . Chesapeake is the largest producer of natural gas in the United States and is headquartered in Oklahoma City. Checkpoint 3.3 AFS-76 . Checkpoint 3.3 AFS-77 . Checkpoint 3.3 AFS-78 . Checkpoint 3.3 AFS-79 . managers) and externally (by bankers.Why Do We Analyze Financial Statements? • A firm’s financial statements can be analyzed internally (by employees. customers. investors. AFS-80 . and other interested parties). Why Do We Analyze Financial Statements? (cont. – To evaluate the firm’s financial performance in light of its competitors and determine how the firm might improve its operations. – To compare the financial performance of the firm’s different divisions. such as those associated with the launch of a new product.) • An internal financial analysis might be done: – To evaluate the performance of employees and determine their pay raises and bonuses. – To prepare financial projections. AFS-81 . ) • A variety of firms and individuals that have an economic interest might also undertake an external financial analysis: – Banks and other lenders deciding whether to loan money to the firm. – Suppliers who are considering whether to grant credit to the firm. AFS-82 . – Credit-rating agencies trying to determine the firm’s creditworthiness.Why Do We Analyze Financial Statements? (cont. AFS-83 .Why Do We Analyze Financial Statements? (cont.) • Professional analysts who work for investment companies considering investing in the firm or advising others about investing. • Individual investors deciding whether to invest in the firm. Common Size Statements – Standardizing Financial Information • A common size financial statement is a standardized version of a financial statement in which all entries are presented in percentages. AFS-84 . • A common size financial statement helps to compare entries in a firm’s financial statements. even if the firms are not of equal size. AFS-85 . – For a common size balance sheet.Common Size Statements – Standardizing Financial Information (cont. divide each entry in the income statement by the company’s sales.) • How to prepare a common size financial statement? – For a common size income statement. divide each entry in the balance sheet by the firm’s total assets. J.Common Size Income Statement (H.) AFS-86 . Inc. Boswell. 1% of the firm’s sales.Table 4-1 Observations • Table 4-1 is created by dividing each entry in the income statement found in Table 3-1 by firm sales for 2010. AFS-87 . – After accounting for all expenses.6% of firm’s sales. – Selling expenses account for about 3% of sales. the firm generates net income of 7. – Cost of goods sold make up 75% of the firm’s sales resulting in a gross profit of 25%. Income taxes account for 4. Inc. Boswell. J.) AFS-88 .Common Size Balance Sheet (H. 8% in 2010. showing a decline of 1.7%.Table 4-2 Observations • Table 4-2 is created by dividing each entry in the balance sheet found in Table 3-2 by total assets for the year.2% of firm’s assets. – Long-term debt account for 39. AFS-89 . – Total current assets increased by 5. – Retained earnings increased by 5.6% in 2010 while total current liabilities declined by 2%. AFS-90 . Hence.Using Financial Ratios • Financial ratios provide a second method for standardizing the financial information on the income statement and balance sheet. more in-depth analysis must be done. • A ratio by itself may have no meaning. a given ratio is compared to: (a) ratios from previous years. • If the differences in the ratios are significant. or (b) ratios of other firms in the same industry. Are the firm’s managers creating value for shareholders? Category of Ratios Used Liquidity ratios Capital structure ratios Asset management efficiency ratios Profitability ratios Market value ratios AFS-91 . How liquid is the firm? Will it be able to pay its bills as they become due? 2.) Question 1.Using Financial Ratios (cont. How efficient has the firm’s management been in utilizing it assets to generate sales? 4. How has the firm financed the purchase of its assets? 3. Has the firm earned adequate returns on its investments? 5. We can analyze a firm’s liquidity from two perspectives: – Overall or general firm liquidity – Liquidity of specific current asset accounts AFS-92 .Liquidity Ratios • Liquidity ratios address a basic question: How liquid is the firm? • A firm is financially liquid if it is able to pay its bills on time. AFS-93 .Liquidity Ratios (cont.) • Overall liquidity is analyzed by comparing the firm’s current assets to the firm’s current liabilities. • Liquidity of specific assets is analyzed by examining the timeliness in which the firm’s primary liquid assets – accounts receivable and inventories – are converted into cash. Liquidity Ratios: Current Ratio • The overall liquidity of a firm is analyzed by computing the current ratio and acidtest ratio. AFS-94 . • Current Ratio: Current Ratio compares a firm’s current (liquid) assets to its current (short-term) liabilities. • What is the current ratio for 2009? AFS-95 .J.) • The text computes the current ratio for H. Inc. for 2010.Liquidity Ratios: Current Ratio (cont. Boswell. ) • Current Ratio = $477 ÷ 292.23 times as the current assets increased significantly in 2010.63 times • The firm had $1.63 in current assets for every $1 it owed in current liability. The current ratio improved in 2010 to 2.Liquidity Ratios: Current Ratio (cont. AFS-96 .5 = 1. AFS-97 .Liquidity Ratios: Quick Ratio • The overall liquidity of a firm is also analyzed by computing the Acid-Test (Quick) Ratio. This ratio excludes the inventory from current assets as inventory may not always be very liquid. Inc. Boswell. for 2010. • What is the quick ratio for 2009? AFS-98 .Liquidity Ratios: Quick Ratio (cont.J.) • The text computes the quick ratio for H. AFS-99 .63 times • The firm is clearly less liquid using quick ratio as the firm has only $0.63 in current assets (less inventory) to cover $1 in current liabilities.) • Quick Ratio = ($477-$299.50) ÷ ($292.Liquidity Ratios: Quick Ratio (cont. The quick ratio improved in 2010 to 0.94 times largely due to an increase in current assets.50) = 0. AFS-100 .Liquidity Ratios: Individual Asset Categories • We can also measure the liquidity of the firm by examining the liquidity of individual current asset accounts. • We can assess the liquidity of the firm by measuring how long it takes the firm to convert its accounts receivables and inventories into cash. including accounts receivable and inventories. Liquidity Ratios: Accounts Receivable • Average Collection Period measures the number of days it takes the firm to collects its receivables. AFS-101 . 500 million in 2009? AFS-102 . • What will be the average collection period for 2009 if we assume that the annual credit sales were $2. Inc. Boswell.Liquidity Ratios: Accounts Receivable (cont. for 2010.) • The text computes the average collection period for H.J. 37 days. AFS-103 .5m ÷ $6.) • Daily Credit Sales – = $2.85 million • Average Collection Period = Accounts Receivable ÷ Daily Credit Sales = $139.37 days • The firm collects its accounts receivable in 20.500 million ÷ 365 days = $6.85m = 20.Liquidity Ratios: Accounts Receivable (cont. AFS-104 .Liquidity Ratios: Accounts Receivable Turnover Ratio • Accounts Receivable Turnover Ratio measures how many times accounts receivable are “rolled over” during a year. Boswell. Inc. for 2010.Liquidity Ratios: Accounts Receivable Turnover Ratio • The text computes the accounts receivable turnover ratio for H.J.500 million in 2009? AFS-105 . • What will be the accounts receivable turnover ratio for 2009 if we assume that the annual credit sales were $2. 500 million ÷ $139. AFS-106 .92 times • The firm’s accounts receivable were turning over at 17.92 times per year.Liquidity Ratios: Accounts Receivable Turnover Ratio • Accounts Receivable Turnover = $2.50 = 17. AFS-107 .Liquidity Ratios: Inventory Turnover Ratio • Inventory turnover ratio measures how many times the company turns over its inventory during the year. Shorter inventory cycles lead to greater liquidity since the items in inventory are converted to cash more quickly. Inc.980 million in 2009? AFS-108 . • What will be the inventory turnover ratio for 2009 if we assume that the cost of goods sold were $1.J. for 2010. Boswell.Liquidity Ratios: Inventory Turnover Ratio • The text computes the inventory turnover ratio for H. 63 times • The firm turned over its inventory 8.980 ÷ $229. AFS-109 .50 = 8.Liquidity Ratios: Inventory Turnover Ratio (cont.63 times per year.) • Inventory Turnover Ratio = $1. Liquidity Ratios: Days’ Sales in Inventory • We can express the inventory turnover ratio in terms of the number of days the inventory sits unsold on the firm’s shelves.63 = 42. on average. • Days’ Sales in Inventory = 365÷ inventory turnover ratio = 365 ÷ 8.29 days • The firm. AFS-110 . holds it inventory for about 42 days. • However. an excessive investments in liquid assets can prove to be costly as liquid assets (such as cash) generate minimal return. AFS-111 .Can a Firm Have Too Much Liquidity? • A high investment in liquid assets will enable the firm to repay its current liabilities in a timely manner. Computer giant Dell has offered to put the new device in their laptops if your firm will extend them credit terms that allow them 90 days to pay.Checkpoint 4. your boss has asked that you look into Dell’s liquidity and analyze its ability to pay their bills on time using the following accounting information for Dell and two other computer firms (figures in thousands of dollars): AFS-112 . Since your company does not have many cash resources.1 Evaluating Dell Computer Corporation’s (DELL) Liquidity You work for a small company that manufactures a new memory storage device. 1 AFS-113 .Checkpoint 4. Checkpoint 4.1 AFS-114 . 1 AFS-115 .Checkpoint 4. Checkpoint 4. Why do you think this ratio is so much lower than Dell’s inventory turnover ratio? AFS-116 .1: Check Yourself Calculate HP’s inventory turnover ratio. This ratio will measure how many days items remain in inventory before being sold. • Inventory turnover ratio is important as it has implications for cash flows and profitability of a firm. AFS-117 .Step 1: Picture the Problem • One of the indicators of liquidity of the firm is the inventory turnover ratio. This will give us clues about inventory practices at HP.Step 2: Decide on a Solution Strategy • We will use the inventory turnover ratio to determine HP’s inventory turnover ratio. • We will use the following equation to compute the Inventory Turnover (IT) ratio – IT ratio = Cost of Goods Sold ÷ Inventories AFS-118 . Step 3: Solve • Inventory Turnover Ratio for HP – = Cost of Goods Sold ÷ Inventories – = $69.000 ÷ 7.93 AFS-119 .178.750.000 – = 8. This is much higher than Dell that has an inventory turnover ratio of 79.87 days. • The significant difference must be investigated further as the two firms are in the same industry.Step 4: Analyze • HP’s inventory turnover ratio indicates that the inventory at HP remains on shelf for (365 ÷ 8.93) days or 40.79 or shelf life of only 4.57 days. AFS-120 . – HP carries more parts inventory on hand than does Dell AFS-121 .Step 4: Analyze (cont.) • There are two reasons why HP has a lower turnover of inventories relative to Dell: – HP sells computers out of inventory of computers while Dell builds computers only when orders are received. to answer the question. • Capital structure ratios address the important question: How has the firm financed the purchase of its assets? • We will use two ratios. AFS-122 .Capital Structure Ratios • Capital structure refers to the way a firm finances its assets. debt ratio and times interest earned ratio. AFS-123 .Capital Structure Ratios (cont.) • Debt ratio measures the proportion of the firm’s assets that are financed by borrowing or debt financing. for 2010.) • The text computes the debt ratio for H.J. Inc. Boswell.Capital Structure Ratios (cont. • What will be the debt ratio for 2009? AFS-124 . 39% of its assets with debt.) • Debt Ratio – = $1.Capital Structure Ratios (cont. AFS-125 .764 million – = 57.40% • The firm financed 57.50 million ÷ $1.012. AFS-126 .Capital Structure Ratios (cont. – We use EBIT or operating income as interest expense is paid before a firm pays its taxes.) • Times Interest Earned Ratio measures the ability of the firm to service its debt or repay the interest on debt. • What will be the times interest earned ratio for 2009 if we assume interest expense of $65 million and EBIT of $350 million? AFS-127 . for 2010.Capital Structure Ratios (cont.J. Boswell. Inc.) • The text computes the times interest earned ratio for H. even if the EBIT shrinks by 81.58).38 times or interest consumed 1/5.Capital Structure Ratios (cont. the firm will be able to pay its interest expense.58% of its EBIT.38 times • Thus the firm can pay its total interest expense 5. AFS-128 .) • Times Interest Earned = $350 million ÷ $65 million = 5. Thus.38th or 18.42% (10018. In your finance class you learned that an important determinant of the risk of investing in a firm’s stock is driven by the firm’s capital structure. Both firms operate chains of home improvement stores throughout the United States and other parts of the world. In particular. Consequently. Just how much debt financing have the two firms used? AFS-129 .2 Comparing the Financing Decisions of Home Depot (HD) and Lowes Corporation (LOW) You inherited a small sum of money from your grandparents and currently have it in a savings account at your local bank.Checkpoint 4. After enrolling in your first finance class in business school you have decided that you would like to begin investing your money in the common stock of a few companies. the greater is the risk that the firm may become insolvent and bankrupt. the first thing you want to do before investing in either company’s stock is to compare how they financed their investments. or how it has financed its assets. the more money the firm borrows. The first investment you are considering is stock in either Home Depot or Lowes. Checkpoint 4.2 AFS-130 . 2 AFS-131 .Checkpoint 4. 2 AFS-132 .Checkpoint 4. 9346 billion? Similarly if Lowes’ net operating income dropped by 80%.Checkpoint 4.2: Check Yourself What would be Home Depot’s times interest earned ratio if interest payments remained the same. but net operating income dropped by 80% to only $1. what would its times interest earned ratio be? AFS-133 . • The ratio requires comparing net operating income or EBIT with Interest expense.Step 1: Picture the Problem • Times interest earned ratio is an important ratio for firms that use debt financing. AFS-134 . It measures the firm’s ability to service its debt. Both items are found on the income statement. Step 1: Picture the Problem (cont.) • Picture an Income Statement – Sales EBIT • • • • • • • • Less: Cost of Good Sold Equals: Gross Profit Less: Operating Expenses Equals: Net Operating Income (EBIT) Less: Interest Expense Equals: Earnings before Taxes Less: Taxes Equals Net Income Interest Expense AFS-135 . • TIE = EBIT ÷ Interest Expense AFS-136 .Step 2: Decide on a Solution Strategy • Here we are considering the impact of a drop in EBIT on the times interest earned ratio of Home Depot and Lowes. We will use the following ratio to measure the times interest earned (TIE) ratio. 9346 billion ÷ $0.03 billion ÷$0.Step 3: Solve • Times Interest Earned (TIE) – = EBIT ÷ Interest Expense • TIE (Home Depot) – = $1.69 times AFS-137 .392 billion = 4.154 billion = 6.94 times • TIE (Lowes) – = $1. • Should creditors be worried by this drop? AFS-138 .69 for Lowes.Step 4: Analyze • We observe that a drop in net operating income leads to a significant drop in times interest earned ratio for both the firms.94 for Home Depot and from 33. • The times interest earned ratio drops from 24.68 to 4.45 to 6. it can still pay its interest expense. it indicates that the firm can pay its interest expense 4.94 = 1-.94 times out of its EBIT.Step 4: Analyze (cont.) • The ratio is still reasonably safe. for Home Depot.75% (11/4. even if the EBIT shrank further by 79.2025 or 79.75%). • For example. AFS-139 . Thus. 000 = 15% (ignore taxes for this example) AFS-140 . ROE = 15.000.000. Its earnings this year total $15.000 100.How does Leverage work? • Suppose we have an all equityfinanced firm worth $100. 4.000 .000 22% AFS-141 .000. and half 8% debt (bonds).000 firm is financed with half equity. Earnings are still $15.000 = 50. ROE = 15.How does Leverage work? • Suppose the same $100. AFS-142 . • They are commonly referred to as turnover ratios as they reflect the number of times a particular asset account balance turns over during a year.Asset Management Efficiency Ratios • Asset management efficiency ratios measure a firm’s effectiveness in utilizing its assets to generate sales. AFS-143 .Asset Management Efficiency Ratios (cont.) • Total Asset Turnover Ratio represents the amount of sales generated per dollar invested in firm’s assets. Asset Management Efficiency Ratios (cont.) • The text computes the total asset turnover ratio for H. • What will be the total asset turnover ratio for 2009 if we assume the total sales in 2009 were $2.500 million? AFS-144 . Boswell.J. for 2010. Inc. 500 million ÷ $1.) • Total Asset Turnover – = $2.42 in sales per dollar of assets in 2009.Asset Management Efficiency Ratios (cont. AFS-145 .764 million = 1.42 times • Thus the firm generated $1. AFS-146 .Asset Management Efficiency Ratios (cont. plant and equipment).) • Fixed asset turnover ratio measures firm’s efficiency in utilizing its fixed assets (such as property. ) • The text computes the fixed asset turnover ratio for H. Inc. Boswell. • What will be the fixed asset turnover ratio for 2009 if we assume sales of $2.J.Asset Management Efficiency Ratios (cont.500 million for 2009? AFS-147 . for 2010. AFS-148 .500 million ÷ $1.94 times • The firm generated $1.287 million = 1.94 in sales per dollar invested in plant and equipment.Asset Management Efficiency Ratios (cont.) • Fixed Asset Turnover – = $2. • We had earlier computed the receivables turnover and inventory turnover.) • We could similarly compute the turnover ratio for other assets. AFS-149 . which measured firm effectiveness in managing its investments in accounts receivables and inventories.Asset Management Efficiency Ratios (cont. Asset Management Efficiency Ratios (cont.327.37 • Fixed Asset Turnover = Sales ÷ Net Plant and Equipment = $2.700m ÷ $1.700m ÷$1.5m = AFS-150 .) For Boswell.971m = 1. 2010 • Total Asset Turnover = Sales ÷ Total Assets = $2. 67 times • Inventory Turnover = Cost of Goods Sold ÷ Inventories = $2.700m ÷ $162m = 16.) For Boswell.36 times AFS-151 .Asset Management Efficiency Ratios (cont.025m ÷$378m = 3. 2010 • Receivables Turnover = Credit Sales ÷ Accounts Receivable = $2. 75 14. Turnover Ratio Total Assets Fixed Assets Receivables Inventory Boswell 1.) • The following grid summarizes the efficiency of Boswell’s management in utilizing its assets to generate sales in 2010.67 5.36 Peer Group 1.0 Assessment Good Good Good Poor AFS-152 .Asset Management Efficiency Ratios (cont.03 16.60 7.15 1.37 2. and the firm’s rate of return on investments. AFS-153 .Profitability Ratios • Profitability ratios address a very fundamental question: Has the firm earned adequate returns on its investments? • We answer this question by analyzing the firm’s profit margin. which predict the ability of the firm to control its expenses. ) • Two fundamental determinants of firm’s profitability and returns on investments are the following: – Cost Control • Is the firm controlling costs and earning reasonable profit margin? – Efficiency of asset utilization • Is the firm efficiently utilizing the assets to generate sales? AFS-154 .Profitability Ratios (cont. Profitability Ratios (cont. AFS-155 .) • Gross profit margin shows how well the firm’s management controls its expenses to generate profits. Profitability Ratios (cont. Boswell.J.) • The text computes the gross profit margin ratio for H. Inc.500 million and gross profit of $650 million for 2009? AFS-156 . for 2010. • What will be the gross profit margin ratio for 2009 if we assume sales of $2. 500 million = 26% • The firm spent $0.) • Gross Profit Margin – = $650 million ÷ $2.74 for cost of goods sold for each dollar of sales. Thus. $0. AFS-157 .Profitability Ratios (cont.26 out of each dollar of sales goes to gross profits. Profitability Ratios (cont. AFS-158 . It thus also indicates how well the firm is managing its income statement.) • Operating Profit Margin measures how much profit is generated from each dollar of sales after accounting for both costs of goods sold and operating expenses. Profitability Ratios (cont.J. Boswell. Inc. for 2010.500 million and net operating income of $350 million for 2009? AFS-159 .) • The text computes the operating profit margin ratio for H. • What will be the operating profit margin ratio for 2009 if we assume sales of $2. ) • Operating Profit Margin = $350 million ÷ $2. AFS-160 .14 in operating profit for each dollar of sales.Profitability Ratios (cont.500 million = 14% • Thus the firm generates $0. ) • Net Profit Margin measures how much income is generated from each dollar of sales after adjusting for all expenses (including income taxes). • AFS-161 .Profitability Ratios (cont. Boswell.J. for 2010. • What will be the net profit margin ratio for 2009 if we assume sales of $2. Inc.500 million and net income of $217.) • The text computes the net profit margin ratio for H.Profitability Ratios (cont.75 million for 2009? AFS-162 . ) • Net Profit Margin – = $217.500 million = 8. AFS-163 .Profitability Ratios (cont.087 for each dollar of sales after all expenses (including income taxes) were accounted for.75 million ÷ $2.71% • The firm generated $0. contributing to profit margins. which takes into account both the management’s success in controlling expenses.Profitability Ratios (cont. and its efficient use of assets to generate sales.) • Operating Return on Assets ratio is the summary measure of operating profitability. AFS-164 . J. • What will be the operating return on assets ratio for 2009 if we assume EBIT or net operating income of $350 million for 2009? AFS-165 . Boswell.) • The text computes the operating return on assets ratio for H. for 2010.Profitability Ratios (cont. Inc. Profitability Ratios (cont.84% • The firm generated $0. AFS-166 .) • Operating Return on Assets – = $350 million ÷$1.764 million = 19.1984 of operating profits for every $1 of its invested assets. ) • Decomposing the OROA ratio: We can use the following equation to decompose the OROA ratio that allows us to analyze the firm’s ability to control costs and utilize its investments in assets efficiently. AFS-167 .Profitability Ratios (cont. ) AFS-168 .Profitability Ratios (cont. • Firm’s OPM (operating profit margin) is lower than its peers. Thus the firm generated more sales from its assets. Thus the firm retained a lower percentage of its sales in net operating income. • Firm’s TATO (total asset turnover ratio) is higher than its peers.Figure 4-1 Observations • Firm’s OROA (operating return on assets) is better than its peers. AFS-169 . Thus the firm earned more net operating income per dollar invested in assets. The firm must investigate the cost of goods sold and operating expenses to see if there are opportunities to reduce costs.Reduce costs .Figure 4-1 Recommendations • The firm has two opportunities to improve its profitability: 1. 2. AFS-170 .Reduce inventories – The firm must investigate if it can reduce the size of its inventories. 3 Evaluating the Operating Return on Assets Ratio for Home Depot (HD) and Lowes (LOW) In Checkpoint 4.Checkpoint 4. Calculate the net operating income each firm earned during 2007 relative to the total assets of each firm using the information found below: AFS-171 .2 we evaluated how much debt financing Home Depot and Lowes used. We continue our analysis by evaluating the operating return on assets (OROA) earned by the two firms. 3 AFS-172 .Checkpoint 4. Checkpoint 4.3 AFS-173 . Checkpoint 4.3 AFS-174 . 3: Check Yourself If Home Depot were able to raise its total asset turnover ratio to 2.5 while maintaining its current operating profit margin. what would happen to its operating return on assets? AFS-175 .Checkpoint 4. AFS-176 . improvement in total asset turnover ratio.e.Step 1: Picture the Problem • The operating return on assets ratio for a firm is determined by two factors: cost control and efficiency of asset utilization. Here the focus is on asset utilization i. It is expressed by equation 4-13a. Step 2: Decide on a Solution Strategy • We will analyze the impact on operating return on assets of improvement on the total asset turnover ratio by using the following equation: • Operating Return on Assets (OROA) – = Total Asset Turnover × Operating Profit Margin AFS-177 . 65% = 26.74 × 10.53% • Now = 2.5 × 10.65% = 18.Step 3: Solve • Operating Return on Assets (OROA) – = Total Asset Turnover × Operating Profit Margin • Before = 1.63% AFS-178 . Step 4: Analyze • An improvement in total asset turnover ratio has a favorable impact on Home Depot’s operating return on assets (OROA). • If Home Depot wants to increase its OROA more. AFS-179 . it should focus on cost control that will help improve the net operating profit. AFS-180 .Is the Firm Providing a Reasonable Return on the Owner’s Investment? • A firm’s net income consists of earnings that is available for distribution to the firm’s shareholders. Return on Equity ratio measures the accounting return on the common stockholders’ investment. for 2010. • What will be the return on equity ratio for 2009 if we assume net income of $217.) • The text computes the return on equity ratio for H.75 million for 2009? AFS-181 .J. Inc. Boswell.Is the Firm Providing a Reasonable Return on the Owner’s Investment (cont. 97% on their investments.) • Return on Equity – = $217. • Note common equity includes both common stock plus the firm’s retained earnings. AFS-182 .98% • Thus the shareholders earned 28.75 million ÷ $751.50 million = 28.Is the Firm Providing a Reasonable Return on the Owner’s Investment (cont. efficiency and an equity multiplier. AFS-183 . The equity multiplier increases in value as the firm uses more debt. – ROE = Profitability × Efficiency × Equity Multiplier • Equity multiplier captures the effect of the firm’s use of debt financing on its return on equity.Using the DuPont Method for Decomposing the ROE ratio • DuPont method analyzes the firm’s ROE by decomposing it into three parts: profitability. Using the DuPont Method for Decomposing the ROE ratio (cont.) • ROE = Profitability × Efficiency × Equity Multiplier • ROE = Net Profit Margin × Total Asset Turnover Ratio × 1/(1-debt ratio) AFS-184 . 5% Net Profit Total Asset Equity Margin Turnover Multiplier 7. Inc.37 2.0% 10.15 1. Boswell.2% 1.6% 1.16 18. Peer Group 22. J.) • The following table shows why Boswell’s return on equity was higher than its peers.Using the DuPont Method for Decomposing the ROE ratio (cont. Return on Equity H.54 AFS-185 . 54). • Note use of financial leverage may not always generate value for shareholders. Impact of financial leverage is discussed in detail in chapter 15.) • The table suggests that Boswell had a higher ROE as it was able to generate more sales from its assets (1.16 versus 1.Using the DuPont Method for Decomposing the ROE ratio (cont.37 versus 1.15 for peers) and used more leverage (2. AFS-186 . Using the DuPont Method for Decomposing the ROE ratio (cont.) AFS-187 . how are the firm’s shares valued in the stock market? • Two market value ratios are: – Price-Earnings Ratio – Market-to-Book Ratio AFS-188 .Market Value Ratios • Market value ratios address the question. ) • Price-Earnings (PE) Ratio indicates how much investors are currently willing to pay for $1 of reported earnings. AFS-189 .Market Value Ratios (cont. and the total number of common shares outstanding are 90 million? AFS-190 . • What will be the PE ratio for 2009 if we assume the firm’s stock was selling for $22 per share at a time when the firm reported a net income of $217.) • The text computes the PE ratio for H. Boswell.75 million.Market Value Ratios (cont.J. for 2010. Inc. ) • Earnings per share – = $217.75 million ÷ 90 million = $2.09 • The investors were willing to pay $9.09 for every dollar of earnings per share that the firm generated. AFS-191 .42 • PE ratio = $22 ÷ $2.Market Value Ratios (cont.42 = 9. Market Value Ratios (cont.) • Market-to-Book Ratio measures the relationship between the market value and the accumulated investment in the firm’s equity. AFS-192 . Inc.) • The text computes the market-to-book ratio for H. • What will be the market-to-book ratio for 2009 given that the current market price of the stock is $22 and the firm has 90 million shares outstanding? AFS-193 . Boswell.Market Value Ratios (cont.J. for 2010. 35 = 2.63 times AFS-194 .50 million ÷ 90 million = $8.) • Book Value per Share – = 751.35 per share • Market-to-Book Ratio = Market price per share ÷ Book value per share = $22 ÷ $8.Market Value Ratios (cont. 4 Comparing the Valuation of Dell (DELL) to Apple (APPL) Using Market Value Ratios The following information on Dell and Apple was gathered on April 9. 2010: AFS-195 .Checkpoint 4. 4 AFS-196 .Checkpoint 4. Checkpoint 4.4 AFS-197 . Checkpoint 4.4: Check Yourself What price per share for Dell would it take to increase the firm’s price-toearnings ratio to the level of Apple? AFS-198 . pictured as follows: Price per share standardized by EPS = Net income ÷ number Of shares outstanding PE Ratio = Price per share ÷ Earnings per share AFS-199 .Step 1: Picture the Problem • Price-to-earnings (PE) ratio depends on earnings per share and price per share. 14 AFS-200 . • PE ratio = Price per share ÷ Earnings per share • ==> 18.04 to 18.20 = ? ÷ 1.20. PE ratio of Dell has to increase from 11.Step 2: Decide on a Solution Strategy • We need to determine the price per share that will make PE ratio of Dell equal to the PE ratio of Apple. 14 • Price per share = 18.75 AFS-201 .Step 3: Solve • PE ratio = Price per share ÷ Earnings per share • 18.14 = $20.20 = Price per share ÷ $1.20 × 1. Step 4: Analyze • PE ratio allows us to compare two stocks with different prices by standardizing the stock prices by earnings. • Apple has a much higher PE ratio. To reach the same PE valuation, the stock price of Dell will have to increase from $12.54 to $20.75. AFS-202 Summing up the Financial Analysis of H. J. Boswell, Inc. • Liquidity: With the exception of inventory turnover ratio, liquidity ratios were adequate to good. The next step will be to see how inventory management can be improved. • Financial Leverage: The firm uses more debt than its peers, which exposes the firm to a higher degree of financial risk or potential default on its debt in the future. AFS-203 Summing up the Financial Analysis of H. J. Boswell, Inc. • Profitability: H.J. Boswell had favorable net operating income despite lower profit margins, largely due to its higher asset turnover ratio. The return on equity was also higher than the peer group due to use of more debt. • Market Value Ratios: These ratios suggest that the market is pleased with the firm as indicated by higher stock valuations. AFS-204 Selecting a Performance Benchmark • There are two types of benchmarks that are commonly used: – Trend Analysis – involves comparing a firm’s financial statements over time. – Peer Group Comparisons – involves comparing the subject firm’s financial statements with those of similar, or “peer” firms. The benchmark for peer groups typically consists of firms from the same industry or industry average financial ratios. AFS-205 Trend Analysis AFS-206 . June 2009 AFS-207 ..Financial Analysis of the Gap. Inc. The Limitations of Ratio Analysis 1. Picking an industry benchmark can sometimes be difficult. 2. Published peer-group or industry averages are not always representative of the firm being analyzed. 3. An industry average is not necessarily a desirable target or norm. AFS-208 The Limitations of Ratio Analysis (cont.) 4. Accounting practices differ widely among firms. 5. Many firms experience seasonal changes in their operations. 6. Financial ratios offer only clues. We need to analyze the numbers in order to fully understand the ratios. 7. The results of financial analysis are dependent on the quality of the financial statements. AFS-209 Practice Problems AFS-210 Example #1 • Assume you are given the following relationships for the Brauer Corporation: – Sales / Total Assets 1.5x – Return on Assets (ROA) 3% – Return on Equity (ROE) 5% Calculate Brauer’s profit margin and debt ratio. AFS-211 D/TA = 1 .5 Profit margin = 3% / 1.40 = 40% AFS-212 .60 = 0.Example #1 ROA = Profit margin × Total assets turnover 3% = Profit margin x 1.5 = 2% ROE = ROA × TA/E 5% = 3% × TA/E TA/E = 5% / 3% E/TA = 3/5 = 60% therefore.0. 5x – Accounts receivable turnover: 10x – Gross profit margin on sales: 25% – Inventory turnover ratio: 5x AFS-213 .Team Assignment Complete the balance sheet and sales information in the table that follows for Hoffmeister Industries using the following financial data (all sales are on credit): – Debt Ratio: 50% – Current Ratio: 1.8x – Total assets turnover: 1. .Team Assignment BALANCE SHEET C ash A c c o u n ts re c e iv a b le In v e n to rie s F ix e d a s s e ts T o ta l a s s e ts S a le s A c c o u n ts p a y a b le L o n g -te rm d e b t C o m m o n s to c k R e t a i n e d e a r n i n g s 66 666 .6 6 T o t a l l i a b i l i t i e s & e q u i t y 6 6 C o s t o f g o o d s s o ld AFS-214 66 666 . $6 6 . Team Assignment 1. 5.500 = $52.000) = $150.500. 4. Sales = (1.$60.000.50)($300.0. 2. AFS-215 .000 = $90.000.000 . Cost of goods sold = (Sales)(1 . Debt = (0.000 .50)(Total assets) = (0.Debt Retained earnings = $300.25) = ($450.5)($300. Inventories = Cost of goods sold /5 = $337.500.5)(Total assets) = (1. Accounts payable = Debt – Long-term debt = $150.500 6. 3.000.75) = $337.000 .000)(0.000) = $450.500/5 = $67.$150. Common stock = Total liabilities & equity .$97. ($49.500) = $138.000 + $67. 9.(Cash + Accts rec. + Inventories) Fixed assets = $300.8)(Accounts payable) Cash + $45.500.000 .500 + $45.8)($90.000 Cash = $49. AFS-216 .000.500 = $162. Accounts receivable = Credit Sales / Accounts receivable turnover = ($450.000/10) = $45. Cash + Accounts receivable + Inventories = (1.000) Cash + $112. 8.000. Fixed assets = Total assets .000 + $67.Team Assignment 7.500 = (1.