PORTFOLIO

Financial Statement Analysis: Quantitative Techniques-Analyzing Liquidity, Profitability, and Asset Utilization (Portfolio 5133)

BNA Tax and Accounting Portfolio 5133-2nd, Financial Statement Analysis: Quantitative Techniques-Analyzing Liquidity, Profitability, and Asset Utilization (Accounting Policy and Practice Series), explains and illustrates how users of financial statements can employ a wide variety of quantitative techniques to improve the usefulness of the information contained in those statements.

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DESCRIPTION

BNA Tax and Accounting Portfolio 5133-2nd, Financial Statement Analysis: Quantitative Techniques-Analyzing Liquidity, Profitability, and Asset Utilization (Accounting Policy and Practice Series), explains and illustrates how users of financial statements can employ a wide variety of quantitative techniques to improve the usefulness of the information contained in those statements. This work complements BNA Tax and Accounting Portfolio 5134-2nd, Financial Statement Analysis: Quantitative Techniques-Analyzing Solvency, Price Multiples, and Cash Flow (Accounting Policy and Practice Series), as well as other Portfolios in the Accounting Policy and Practice Series that focus on specific accounting subjects.
The three major categories of quantitative techniques discussed in this Portfolio are:
• trend analysis, which analysts use to identify changes in financial statement and related information within an organization over time;
• common-size analysis, which helps analysts compare an organization's financial position and performance with those of other organizations and with industry or sector benchmarks; and
• ratio analysis, which allows analysts to examine various relationships among financial statement items and related information.
The Portfolio explains and illustrates how analysts employ those techniques to meet the objectives of analyzing an organization's (1) liquidity or short-term solvency, (2) profitability (which focuses on the organization's ability to generate revenues and control costs), and (3) asset utilization and efficiency (with particular emphasis on specific operating assets, such as receivables, inventories, and long-term fixed assets). This Portfolio's Worksheets contain sample disclosures of financial statement information and quantitative analyses.
The Portfolio contains numerous examples of questions that various types of financial statement users address during quantitative financial statement analyses. A complete financial statement analysis, however, requires using qualitative techniques to more fully assess an organization's actual financial position and performance and more accurately forecast the organization's value. BNA Tax and Accounting Portfolio 5122-2nd, Financial Statement Analysis: Qualitative Techniques (Accounting Policy and Practice Series), describes and illustrates those qualitative techniques.
This Portfolio may be cited as BNA Tax and Accounting Portfolio 5133-2nd, Glazer and Stevens, Financial Statement Analysis: Quantitative Techniques-Analyzing Liquidity, Profitability, and Asset Utilization (Accounting Policy and Practice Series).


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AUTHORS

ALAN S. GLAZER
Alan S. Glazer, A.B., Franklin & Marshall College; M.A. and Ph.D., University of Pennsylvania, served as associate director of the Independence Standards Board's conceptual framework project and has written several articles on auditor independence and accounting ethics. Dr. Glazer is the co-author with Martha L. Benson of BNA Tax and Accounting Portfolio 5201, Accounting for Museums (Accounting Policy and Practice Series) and with Glenn L. Stevens of Portfolio 5122-2nd, Financial Statement Analysis: Qualitative Techniques (Accounting Policy and Practice Series) and BNA Tax and Accounting Portfolio 5134-2nd Financial Statement Analysis: Quantitative Techniques-Analyzing Solvency, Price Multiples, and Cash Flow (Accounting Policy and Practice Series). He has been teaching financial accounting at Franklin & Marshall College, Lancaster, Pennsylvania, since 1975, where he is the Henry P. and Mary B. Stager Professor of Business and chair of the Department of Business, Organizations and Society. He is a CPA (inactive) in Pennsylvania.

GLENN L. STEVENS
Glenn L. Stevens, B.A. in Economics, Lycoming College; MBA in Management and Masters in Finance, Loyola College (Baltimore, MD); Ph.D., Pennsylvania State University, taught finance courses at Franklin & Marshall College, Lancaster, Pennsylvania, from 1995 through his retirement in June 2007. Before serving on the Franklin & Marshall College faculty, Dr. Stevens spent a career in agricultural banking with the Farm Credit Bank of Baltimore, where he served as chief financial officer and held other executive positions. He is the co-author with Alan S. Glazer of BNA Tax and Accounting Portfolio 5122-2nd, Financial Statement Analysis: Qualitative Techniques (Accounting Policy and Practice Series) and BNA Tax and Accounting Portfolio 5134-2nd Financial Statement Analysis: Quantitative Techniques-Analyzing Solvency, Price Multiples, and Cash Flow (Accounting Policy and Practice Series).

TABLE OF CONTENTS

Detailed Analysis

I. Objectives and Scope of Portfolio

A. Objectives

B. Users of Quantitative Analysis and Their Objectives

C. Usefulness of Quantitative Analysis

D. Relationship to Qualitative Analysis

II. Quantitative Techniques Used in Financial Statement Analysis

A. Introduction and Focus

B. Trend Analysis

1. Objectives

2. Interpretation

3. Growth

4. Example of Trend Analysis

a. Balance Sheet

b. Income Statement

c. Statement of Cash Flows

C. Common-Size Analysis

1. Objectives

2. Interpretation

3. Example of Common-Size Analysis

a. Balance Sheet

b. Income Statement

c. Statement of Cash Flows

D. Ratio Analysis

1. Objectives

2. Historical Development

3. Classification of Financial Statement Ratios

4. Inputs for Ratio Analyses

5. Interpreting the Results of Ratio Analyses

6. Ratio Analysis in This Portfolio

a. Foci

b. Computational Issues

III. Liquidity Analysis

A. Objectives and Focus

B. Assessing Liquidity

C. Current Ratio

D. Quick (or Acid-Test) Ratio

E. Cash Ratio

F. Sales to Cash Ratio

G. Example of Liquidity Analysis

1. Liquidity Ratios

2. Current Ratio

3. Quick Ratio

4. Cash Ratio

5. Sales to Cash Ratio

6. Summary of Liquidity Ratios

H. Other Measures Used in Liquidity Analyses

IV. Profitability Analysis

A. Objectives and Focus

B. Reporting Accounting Income

C. Assessing Profitability

D. Earnings Per Share

1. Corporations With Simple Capital Structures

2. Corporations With Complex Capital Structures

3. Analyzing EPS

E. Return on Assets Ratio (ROA)

F. Return on (Common) Equity Ratio (ROE or ROCE)

G. Return on Sales (ROS) (or Net Profit Margin) Ratio

H. Gross Profit (or Gross Margin) Ratio

I. U.S. Effective Tax Rate (Tax Ratio)

J. Example of Profitability Analysis

1. Profitability Ratios

2. Earnings Per Share

3. Return on Assets Ratio

4. Return on Equity Ratio

5. Return on Sales Ratio

6. Gross Profit Ratio

7. Effective Tax Rate

8. Summary of Profitability Analysis

K. Other Measures Used in Profitability Analyses

V. Asset Utilization and Activity (Efficiency) Analysis

A. Objectives and Focus

B. Assessing Asset Utilization and Activity

C. Inventory Turnover Ratio and Average Number of Days Inventory in Stock (or Days in Inventory)

D. Accounts Receivable Turnover Ratio and Average Number of Days Accounts Receivable Outstanding (or Average Collection Period)

E. Accounts Payable Turnover Ratio and Average Number of Days Accounts Payable Outstanding (or Payables Payment Period)

F. Cash Operating Cycle (or Cash Conversion Cycle)

G. Fixed Assets Turnover Ratio (or PP& E Turnover Ratio)

H. Total Assets Turnover Ratio

I. Example of Asset Utilization and Activity Analysis

1. Asset Utilization and Activity Ratios

2. Inventory Turnover Ratio

3. Average Number of Days Inventory in Stock

4. Accounts Receivable Turnover Ratio

5. Average Number of Days Accounts Receivable Outstanding

6. Accounts Payable Turnover Ratio

7. Average Number of Days Accounts Payable Outstanding

8. Cash Operating Cycle

9. Fixed Assets Turnover Ratio

10. Total Assets Turnover Ratio

11. Summary of Asset Utilization Ratios

Working Papers


WORKING PAPERS

TABLE OF WORKSHEETS

Worksheet 1 Glossary of Abbreviations and Acronyms

Worksheet 2 Hypothetical, Inc. Financial Statements

Worksheet 3 Trend Analysis Disclosures

Worksheet 4 Growth-Related Disclosures

Worksheet 5 Common-Size Analysis Disclosures

Worksheet 6 Sources of Industry Comparisons for Trend and Common-Size Analysis

Worksheet 7 A. Wall, Study of Credit Barometrics, Federal Reserve Bulletin (March 1919) at 229-43

Worksheet 8 Ratio Analysis

Worksheet 9 Liquidity Disclosures

Worksheet 10 Current Ratio Disclosures

Worksheet 11 Profitability Disclosures

Worksheet 12 Earnings Per Share Disclosures

Worksheet 13 Return On Assets Disclosure

Worksheet 14 Effective Income Tax Rate Disclosures

Worksheet 15 Return On Invested Capital Disclosures

Worksheet 16 Asset Utilization and Activity Disclosures

Bibliography

OFFICIAL

Statutes:

Securities and Exchange Commission:

Regulations

Forms

American Institute of Certified Public Accountants:

Accounting Principles Board Opinions (Legacy Standards)

Financial Accounting Standards Board:

FASB Accounting Standards Codification

Statements of Financial Accounting Standards (Legacy Standards)

Concepts Statements

Other

UNOFFICIAL

Articles and Books:

BNA Portfolios:

Internet Sources: