Financial Statement Analysis Basis for Management Advice

by Davidson, Wallace

• ISBN13: 9781119742326
• ISBN10: 1119742323
• Edition: 1st
• Format: Paperback
• Copyright: 2020-07-21
• Publisher: Wiley

Summary

This book presents financial statements as a set of dynamic instruments that can be used for accurate, relevant, and timely financial decisions. It focuses on the economic and financial conditions that cause statements to change and discover how businesses can manage liquidity, debt, and profitability. Plus, explore effect ratios, causal ratios, pro forma analysis, sustainable growth, and much more. Key topics covered include: valuation techniques, effect ratios, DuPont system for analyzing profitability, causal analysis. how to conduct a financial statement analysis, users of financial statements, forecasting sustainable growth, and bankruptcy prediction models.

Author Biography

Wallace N. Davidson, III, Ph.D., CMA, is a professor at Southern Illinois University, Carbondale with 25 years experience in corporate finance. He previously served as a financial analyst in the utility industry. Dr. Davidson is an accomplished author of several continuing education seminars for the AICPA, including the popular "Financial Statement Analysis: Basis for Management Advice." Twice recognized as an AICPA Outstanding Discussion Leader, Dr. Davidson speaks nationally to business organizations and state societies.

Table of Contents

Chapter 1 1-1

Company Valuation 1-1

Why use a valuation technique? 1-2

Who uses valuation techniques? 1-4

Wells Fargo “dividend capitalization” model 1-5

Dividend computation for privately-held corporation 1-7

Review questions 1-9

Chapter 2 2-1

Ratio Analysis: The Effect Ratios 2-1

Effect ratios 2-2

Liquidity 2-3

Inventory to working capital 2-6

Accounts receivables to working capital ratio 2-8

Net sales to working capital (working capital turnover) 2-10

Operating cash flow to current liabilities 2-11

Debt ratios 2-12

Current liabilities to net worth 2-14

Times interest earned 2-15

Net profit to net worth (return on equity) 2-16

Effect ratio summary 2-17

Review questions 2-18

Chapter 3 3-1

Analysis of Profitability Using the DuPont Analysis 3-1

DuPont system 3-2

DuPont system 3-4

Total DuPont system 3-6

Group exercise – Part A 3-7

Group exercise – Part B 3-8

EBITDA analysis 3-9

Earnings quality 3-10

Review questions 3-14

Chapter 4 4-1

Analysis of Financial Statements Using Causal Ratios 4-1

Causal ratios 4-2

Fixed assets to net worth 4-3

How fixed assets affect profit 4-5

Ratios that could be changed by the fixed assets to net worth ratio 4-6

Correction procedures 4-7

Collection period 4-8

Collection period: Example 4-9

Ratios that could be changed by the collection period 4-11

Correction procedures 4-12

Net sales to inventory (inventory turnover) 4-14

Net sales to inventory: Example 4-15

Ratios that could be changed by net sales to inventory 4-17

Correction procedures 4-18

Net sales to net worth 4-19

Trading ratio: Example 4-20

Trading ratio: Example 4-22

Ratios that could be changed by the trading ratio 4-23

Overtrading characteristics 4-24

Correction procedures 4-26

The profit margin 4-27

The profit margin: Example 4-28

Correction procedures 4-29

Miscellaneous assets to net worth 4-30

Correction procedures 4-31

Causal ratio summary 4-32

Review questions 4-33

Chapter 5 5-1

How to Conduct a Financial Statement Analysis 5-1

How to conduct an analysis of financial statements 5-2

Industry and time series analysis 5-3

Sources of industry averages 5-4

Problems with using industry data 5-5

An example of computing industry statistics from risk management associates (formerly Robert Morris) data 5-6

An example of computing industry statistics from Dun and Bradstreet data 5-7

Guidelines to use in applying ratio analysis 5-8

Review questions 5-9

Chapter 6 6-1

Case Studies 6-1

Case study 1: Paper products company 6-2

Case study 2: National west airline 6-4

Case study 3: Firm A 6-7

Case study 4: Store container corporation 6-9

Discussion case 1 6-12

Discussion case 2 6-15

Chapter 7 7-1

Users of Financial Statements 7-1

Ratios examined by banks for short-term loans 7-2

Ratios examined by banks for long-term loans 7-3

Most important financial ratios for commercial loan departments 7-4

Commercial loan departments’ ratios appearing most frequently in loan agreements 7-5

Corporate controllers’ most significant ratios 7-6

Ratios most often appearing in corporate objectives and their primary measures 7-7

Review questions 7-8

Chapter 8 8-1

Forecasting Sustainable Growth 8-1

Definitions 8-2

Derivation of the sustainable growth model 8-3

The Alabama door company 8-4

Calculation of Alabama door growth rate 8-5

Improving sustainable growth 8-6

Sustainable growth: Available external equity 8-7

Chapter 9 9-1

Forecasting Bankruptcy 9-1

Altman’s bankruptcy prediction formula 9-2

Bankruptcy prediction example 9-4

Altman’s second model 9-6

Review questions 9-7

Appendix A A-1

Case Problem A-1

Marine Supply Company Balance Sheet A-4

Marine Supply Company Selected Income Figures A-5

Marine Supply Company Selected Financial Ratios A-6

Case Problem Requirements A-7

Glossary Glossary 1

Index Index 1

Solutions Solutions 1

Chapter 1 Solutions 1

Chapter 2 Solutions 4

Chapter 3 Solutions 8

Chapter 4 Solutions 12

Chapter 5 Solutions 20

Chapter 6 Solutions 22

Chapter 7 Solutions 26

Chapter 8 Solutions 27

Chapter 9 Solutions 28