Paper Ratio and Financial Statement Analysis

In accounting there is much to be learned, about the financial aspects of a business. In the past five weeks I have learned the importance of financial reports and how they relate to the success of an establishment. These reports may include balance sheets and income statements, which help accountants and the public grasp the overall financial condition of a company. The information in these reports is really significant to, managers, owners, employees, and investors. Managers of a business can take and deduce financial

SUMMARY OF STUDY OBJECTIVES 1Identify the sections of a classified balance sheet. In a classified balance sheet, companies classify assets as current assets; long-term investments; property, plant, and equipment; and intangibles. They classify liabilities as either current or long-term. A stockholders' equity section shows common stock and retained earnings. 2Identify and compute ratios for analyzing a company's profitability. Profitability ratios, such as earnings per share (EPS), measure aspects of the operating success of a company for a given period of time. 3Explain the relationship between a retained earnings statement

In order to ascertain how well a company is performing, analyses must be done in regard to the business being stable, including its’ ability to pay debts, how much cash or other liquid assets are available, and whether the organization is viable enough to continue operations. These analyses typically look at income statements, balance sheets, and statements of cash flow, where current and past performance will be studied with the goal of predicting how the company will perform in the future.

Working capital is the money that a company has after paying off its current liabilities and with which it can finance its operating and working capital requirements. The higher a number the better a company is able to pay off its debt and have cash for meeting its financial obligations. The current ratio is used to gauge a company 's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. The current ratio denotes the efficiency of a company 's operating cycle or its ability to turn its products into cash, which is a key requirement for business success. Quick ratio is an indicator of a company 's short-term liquidity. The quick ratio measures a company 's ability to meet its short-term obligations with its most liquid assets, essentially cash and cash equivalents. The higher the quick ratio, the better the financial position of the company in terms of its ability to meet its liabilities.

While inaccurate accounting can cause misleading information about the company, every successful company should develop an income statement and balance sheet when monitoring financial growth. Also, formulating a horizontal and ratio analysis creates an accurate trend of the company spending behavior and debt-to-ratio venerability. A balance sheet can be considered as the bloodline of the company, allowing a quick view of financial fluency which could be attractive to outside investors. Last but not least, the income statement presents a hard result of gains, liabilities, revenues and debt within a yearly

It is easy to forget that pouring money into a problem will not fix it unless revenue flows continue or are increased and expenses are controlled. Some of the easiest computations can be made with information retrieved from balance sheets and income statements provided by accountants. Ratios such as the current ratio, long-term solvency ratio, contribution ratio, programs and expense ratio, general and management expense ratio, fund-raising and expense ratio, and revenue and expense ratio can provide a picture of where a company stands now compared to where it was in past years and what may need to be done in the future.

Ratio analysis shows the correlation within certain figures of financial statements, like current assets and current liability, and is used for three types of company needs- within, intra- and inter-company. Association can be shown in proportion, rate, or percentage and can evaluate company’s liquidity, profitability, and solvency. Liquidity ratios show company’s ability to pay obligations and fulfill needs for cash; profitability ratios show wellbeing and success for the certain time period; and solvency ratios show company’s endurance over the years.

We are going to assess profitability ratios for 2014 year, including gross profit margins, return on sales, return on total assets, return on stockholder’s equity, and earnings per share. Next we are going to discuss liquidity ratios – current ration, quick ratio. Our analysis will include leverage ratios such as debt-to-equity ratio, interest coverage. Also, we will cover activity ratios including inventory turnover, fixed asset turnover, total assets turnover and accounts receivable turnover. Lastly, we will assess the price/earning ratio, the book value per share ratio, and the cash flow per share ratio.

Working capital is the money that a company has after paying off its current liabilities and with which it can finance its operating and working capital requirements. The higher a number the better a company is able to pay off its debt and have cash for meeting its financial obligations. The current ratio is used to gauge a company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher the current ratio, the more capable the company is of paying its obligations. A ratio under 1 suggests that the company would be unable to pay off its obligations if they came due at that point. The current ratio denotes the efficiency of a company's operating cycle or its ability to turn its products into cash, which is a key requirement for business success. Quick ratio is an indicator of a company's short-term liquidity. The quick ratio measures a company's ability to meet its short-term obligations with its most liquid assets, essentially cash and cash equivalents. The higher the quick ratio, the better the financial position of the company in terms of its ability to meet its liabilities.

Financial statement users around the globe use financial statements to evaluate the performance of companies (Fundamentals of Financial Accounting, 2006). In order to locate a company’s reported assets, liabilities, expenses and revenues, statement users rely on four types of financial statements. The four financial statements include: Balance Sheet, Income Statement, Statement of Retained Earnings, and Statement of Cash Flows (Fundamentals of Financial Accounting, 2006, p. 6). Each of these reports provides different information to the financial statement user. The Balance Sheet reports at a point in time: a company’s assets (what it owns), liabilities (what it owes) and

One is Working capital to total assets ratio that measures a firm’s ability to pay off its short-term liabilities and is calculated by subtracting current liabilities from current assets divided by total assets. The retained earnings to total assets ratio that measures a firm’s use of its total asset base to generate earnings is also used. It is important to note that retained earnings can be easily manipulated distorting the final calculation. The third financial ratio used by the Z score formula is the market value of equity to book value of debt. This is the inverse of the debt to equity ratio, and it shows the amount a firm’s assets can decline in value before liabilities exceed assets. For closely held firms, stockholders’ equity or total assets less total liabilities can be used but this amount has not been statistically verified for purposes of the formula. The sale to total assets ratio that measures a firm’s ability to generate sales with its asset base is also used. The fifth financial ratio is the operating income to total assets. This ratio is the most important factor in the formula because its profit that eventually makes or breaks a firm. In calculating the Z score, each of these ratios is given a weight factor that is used within the formula. (IOMA’s report, 2003). See appendix I for the Z score formula and how to interpret the results obtained. The Z score is used by firms when running regular financial data and firms use it to spot

Before beginning an analysis of a company it is necessary to have a complete set of financial statements, preferably for the pas few years so that historical trends can be obtained. Ratios are a way for anyone to get an idea of the financial performance of a company by using the information contained in the financial statements. Ratios are grouped into four basic categories, liquidity, activity, profitability, and financial leverage. This document will use a variety of these ratios to analyze the firm, Sample Company, as of December 31,2000.

Ratio analysis is a useful tool for analyzing financial statements. Calculating ratios will aid in understanding the company’s strategy and in understanding its strengths and weaknesses relative to other companies and over time. They can sometimes be useful in identifying earnings management and in understanding the effect of accounting choices on the firm’s reported profitability and growth. Finally, the ratios help in obtaining a better understanding of a firm’s current profitability, growth, and risk which can improve forecasts of future profitability and growth and estimates of the cost of capital.

Balance sheets and income statements are a snapshot of a company’s stability and financial situation. Combined the statements show the income, expenses, and stockholder’s equity in the company. These statements are often analyzed by financial institutions when a company comes to them needing a loan. Stockholders and other investors also look at these statements to make sure their investment will return a profit for them. This paper will look at four different companies and their balance sheets and income statements. The companies are Eastman Chemical Company, Covenant Transportation

The income statement measures the flow of business activity by comparing revenues to the expenses over a period of time, as opposed to the momentary status of the business at a point in time (Brian P. Brinig, 2011). The income statement is important because it lists the amount of expenses that were incurred to create the revenues of the company. The biggest typical expenses for a company are the cost of goods sold, advertising and promotion, depreciation, wages and salaries, and rent.