Deep river

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 statements:

1) easier to compare firms of different sizes
2) easier to compare financial information across time as firm grows

III. Ratios

A. Overview

1. Ratios examine relationships between numbers on financial statements

2. Internal uses

1) evaluate performance and determine compensation
2) plan for the future

3. External uses: Analysis of firm by:

1) Suppliers
2) Creditors
3) Stockholders
4) Customers
5) Competitors

A. Ratio Analysis

1. Key => Ratios don’t reveal much by themselves so usually make two basic types of comparisons:

1) industry averages or ratios of strongest competitors
SIC or NAICS codes to determine industry
2) firm’s past own ratios

2. Sources of Industry Ratios

1) RMA
2) MarketGuide.com
3) moneycentral.msn.com

B. Warning Signs

1. Ratios “too” high or low compared to industry or competitors

2. Ratios trending away from industry or competitors

Note: We’ll use Dell for examples

=> see Dell’s financial statements for fiscal 2005 (ends January 28, 2005) and fiscal 2004 (ends January 30, 2004).

C. Cautions:

1. Different people and different sources calculate ratios in different ways

=> be sure comparing ratios calculated