Financial Statement Analysis: Basis for Management Advice

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

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.